Top Glove's Q2 earnings could be flattish on-quarter

KUALA LUMPUR: Maybank Investment Bank Research foresees Top Glove Corporation Bhd's upcoming second quarter earnings could be flattish on-quarter and within expectations. 

It said on Tuesday organic volume growth ahead could be slower as China resumes production gradually and Malaysian players expand capacity. 

“However, earnings growth could accelerate from 4QFY18 with contribution from Aspion,” it said. 

Maybank Research maintained our EPS forecasts, Hold call and target price of RM9.85 (2019 24 times price-to-earnings ratio (PER); and two standard deviations). 

“Trading at 12M forward PER of 25 times, we think current valuation has already priced in all the positives,” it said.
 
Top Glove, which is the world's largest glove maker, is set to release its results for the second quarter ended Feb 28, 2018.

Maybank Research said it expected earnings to be flattish on-quarter(1QFY18: RM105mil net profit). 

Despite the lower US$/RM (-5% on-quarter) impacting revenue receipts and higher costs (i.e. gas tariff hike and foreign worker levy), earnings could be cushioned by a higher sales volume (c.+5% on-quarter) and the upward adjustment in average selling prices (ASPs). 

ASPs of latex gloves were raised by 6% in December while ASPs of nitrile remain unchanged. 

Last Thursday, shareholders voted in favour of Top Glove’s acquisition of Aspion (a surgical glove specialist) for a purchase consideration of RM1.37bil, with 90% of the amount (or RM1.23bil) to be paid in cash and the balance (or RM137mil) to be paid in 21 million new Top Glove shares. 

The deal could be completed in early-April (slightly ahead of its initial target of mid-April). 

“We have incorporated for Aspion’s earnings from May 2018 in our FY18-20F earnings forecasts,” it said. 

Maybank Research said Top Glove’s higher sales volume in FY17-1HFY18 could be partially due to the production cut in China and shortage of gas supply during the winter months. 

“We think its sales volume might see slower growth ahead as China gradually resumes production and Malaysia expands capacity. 

“The sales lead time for its latex and vinyl gloves remain high at 60 days. However, the sales lead time for its nitrile glove has already shortened to 30-45 days (from 60 days in 2HCY17), potentially due to the recent new supply in the market,” said the research house.