Pricing pressure hits Top Glove profit margins


Kenanga Investment Bank Bhd has maintained its ‘Underperform’ call on Top Glove Corp Bhd, but lowered its target price to RM4.20 from RM4.59.

The rubber glove maker closed 14 sen or 3.05% lower yesterday at RM4.45 yesterday, giving it a market capitalisation of RM11.38 billion.

The investment bank said competition in the nitrile glove segment has intensified — leading to pressure on average selling prices (ASPs) which has risen by an average of 25% since end-2016.

“Coupled with the moderating demand and in anticipation of new capacities ramp-ups, we would not be surprised if ASPs come under further pressure over the next two quarters,” the bank stated in its recent research note on Top Glove.

Kenanga has also been made to understand that over the past six months, delivery lead times (the time frame between order and delivery) have recorded 60-70 days compared to 30-45 days, potentially indicating that strong demand is tapering off.

The bank has downgraded its financial year 2019 estimates (FY19E)/FY20E net profits for Top Glove by 5%/4% respectively to take into account the lower than expected ASPs.

Thus, Kenanga downgraded its target price for the company from RM4.45 to RM4.20 based on unchanged 23 times at FY19E earnings per share.

Apart from the lukewarm prospects over the short-to-medium term, Kenanga believes the irregularities discovered at Aspion Sdn Bhd could take longer than expected to recover.

Meanwhile, it said the key upside risk to its rating is higher than expected sales volume.

Kenanga expects Top Glove’s net profit for the second quarter ended Feb 28, 2019 (2Q19), to be lower sequentially due to normalising demand amid shorter delivery lead times, competitive pressure and margins pressure emanating from the appreciation of the ringgit against the US dollar.

If ASP quarter-on-quarter (QoQ) is lower by 4%, but sales volume is up 4%, 2Q19 net profit could be RM109 million (-1% QoQ) which will bring its first-half net profit to RM219 million (+2% year-on-year (YoY) or 45%/43% of its/consensus full-year forecasts.

Kenanga considers such numbers to be below expectations and subsequent quarters results to be muted due to normalising demand, swelling capacities and intensified competition — hence, leading to the ASPs pressure.

Top Glove’s net profit for 1Q19 increased by 4.37% YoY to RM110.06 million due to higher sales revenue.

The rubber glove maker’s sales revenue amounted to RM1.26 billion in the period, 34.5% higher YoY.

Sales volume grew 19% YoY on strong demand from both developed and emerging markets.

The new capacity available from the newly completed factories and higher utilisation, coupled with ongoing internal improvements, resulted in better efficiency and profitability with pretax profit margins improving to 16.3% from 16.1% in 1Q18.