Top Glove to ride the wave of strong demand

KUALA LUMPUR:  CIMB Equities Research expects Top Glove will be a prime beneficiary of the strong growth in demand for gloves, thanks to its plans to boost its capacity by 15% by December 2018. 

“This, coupled with stable raw material costs, bodes well for its FY18F earnings. Downside risks are weaker US$ and stiffer-than-expected pricing competition,” it said on Thursday. 

The research house maintained its earnings forecasts, target price of RM6.90 (based on 19 times CY19 earnings per share) and Add rating. 

To recap, CIMB Research attended Top Glove’s briefing to analysts, media and bankers on Tuesday, where the group shared more details on its recent quarterly results and future plans. 

“Overall, we are more positive following the briefing as the group: (1) indicated that demand remains robust due to closure of several glove factories in China; (2) guided for effective tax rate to remain low at 15% in FY18F; and (3) indicated plans to announce a major acquisition soon,” it said. 

Top Glove targets to grow its share in the glove market to 30% in 2020, from 25% currently.

We understand that several vinyl glove plants in China closed down in 1H17 due to more stringent environmental regulations by the Chinese government. 

The factory closures are expected to last until necessary measures to upgrade the plants to control pollution are undertaken.

 This has resulted in a shortage of vinyl gloves supply, which has consequently helped spur the demand for gloves. 

“We expect this, coupled with relatively stable latex prices and exchange rate, to spur demand for gloves in FY18,” it said. 

Top Glove is fairly confident of sustaining its pretax profit margin of 11.2% achieved in FY17, which is at the mid-range of its pretax profit margin for the past eight years. 

“This is conservative relative to our pretax profit margin projection of 12.2% for FY18F. 

“The group guided for the effective tax rate to be at around 15% in FY18. This is lower than our current effective tax rate forecast of 16% for FY18F, and as such there could be potential upside to our net profit projection for FY18F if it achieves the lower effective tax rate. 

“The group revealed that it is looking to close a deal for a potential acquisition within the next month. We are of the view that the potential acquisition target is likely to be related to the rubber gloves industry, in line with the group’s strategy,” it said. 

CIMB Research said Top Glove plans to undertake an acquisition that may cost up to RM1bil. 

“We are currently neutral on this news pending more details. Top Glove should have the capacity to fund the acquisition as it was in a net cash position of RM70.6mil as at end-August 2017,” it said. 

CIMB Research said Top Glove had acquired a 100% stake in packaging company, Eastern Press Sdn Bhd (EPSB) for RM47.25mil cash. 

Following the acquisition, EPSB will supply 45% of the group’s internal requirement of inner boxes. 

“Overall, we are positive on this deal as we are of the view that (1) this acquisition will be value accretive to Top Glove; and (2) the acquisition price for the asset is attractive. 

Based on the profit guarantee, we estimate EPSB is valued at 10.5 times FY18F P/E. Maintain Add with unchanged TP of RM6.90,” it said.