Affin Hwang Research retains Buy on Top Glove, target price RM5.80

KUALA LUMPUR: Affin Hwang Capital Research expects Top Glove Corporation to be a strong beneficiary of easing supply growth and ongoing sector-wide average selling price (ASP) revisions. 

It said on Friday the forward blended ASP remains on an upward trend, which should sustain bottom-line on-quarter growth. 

“Maintain Buy with an unchanged 12 month target price of RM5.80, pegged to 18 times CY17E earnings per share (EPS). Risks are a sharp appreciation of the Ringgit against the US$ and a higher-than-expected increase in raw material prices,” it said.

Affin Hwang Research said there were no surprises in Top Glove’s 2QFY17 results as reported core net profit of RM83mil was within its earlier range of RM80mil to RM85mil. 

The sequentially firmer earnings were largely driven by the firmer Ringgit and a higher ASP, although this was negated by the slight dip in sales volume on seasonality. 

“Raw material prices are on a downtrend since the peak in early February, which should relieve margin concerns for sequential earnings growth,” it said.

The research house pointed out Top Glove’s 2QFY17 revenue came in higher at RM851mil (+8% on-quarter; +23% on-year). The sequentially improved top line was largely underpinned by the firmer currency rate, as the Ringgit depreciated 6% on-quarter; against the US$. 

“The higher US$ ASP also boosted revenue, as the blended US$ ASP rose 3% on-quarter; in tandem with improved industry supply-demand dynamics, mitigating higher raw material prices,” it said.

Affin Hwang Research said Top Glove's quarterly volume dipped 1% on-quarter; on seasonality given fewer working days due to the festive season, and was affected by tepid capacity additions during the quarter.

Top Glove booked core net profit of RM83mil (+13% on-quarter; -21% on-year). The sequentially improved quarterly earnings were largely in tandem with the higher revenue, and were buoyed by better production efficiencies as the earnings before interest and tax (EBIT) margin expanded 0.5 percentage points on-quarter. 

“Earnings would have been stronger if not for the higher effective tax rate that inched up 1.1 percentage points on-quarter. Overall, earnings were within our estimated range of RM80mil to RM85mil, which was also in line with consensus expectations.

The research house pointed out that  raw material prices, which peaked at more than RM8 a kg in early February, have slipped and stabilised at a range of RM7 to RM7.50 a kg. 

“We expect more downside risk to current prices, as the run-up was speculative-driven and exacerbated by flooding in Southern Thailand. 

“We expect prices to come off lower beginning in April-May, in tandem with the tail end of the winter season, which should relieve margin pressure for glove makers,” it said.
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