PETALING JAYA: Short-term headwinds still persist for Top Glove Corp Bhd , according to analysts who are not too upbeat about the company’s recent third quarter financial year 2017 (FY17) results that came in below market expectations.
Risks for the company, going forward, include lower average selling prices (ASP) amid stiff competition, rise in nitrile and latex prices and stronger ringgit against the US dollar.
Hong Leong Investment Bank (HLIB) said that Top Glove’s revenue grew 15.7% year-on-year (y-o-y) on volume growth, while profit after tax and minority interests declined 21% y-o-y due to higher raw materials cost.
HLIB is keeping a “hold” rating on Top Glove with a lower target price of RM5.20, from RM5.49 previously based on an unchanged price-earnings multiple of 18 times calendar year 2018 earnings per share.
HLIB noted that despite seeing a 29.4% growth in revenue, on the back of higher ASP due to higher raw material prices y-o-y, volumes declined 1% as clients held back their orders.
It expected the effect of ASP revision in the third quarter of FY17 to be quantified in the fourth quarter of FY17.
“Raw material prices of natural rubber latex and nitrile have tapered off significantly since May.
“With the revision in ASP, stable US dollar and lower raw material prices, going forward, we can expect earnings before interest, tax, depreciation and amortisation margin to recover to the 14% to 15% level in the coming quarter,” HLIB said.
Given that raw material prices saw a correction recently, this could lead to a rebound in volume in the fourth quarter, the house noted.
CIMB Research reiterated a “hold” call on Top Glove, from an “add” rating with a higher target price of RM5.75 from RM5.61 previously.
“We raised our target price to RM5.75 (based on 19 times calendar year 2018 forecast price-earnings), but downgrade the stock to ‘hold’ as it is fairly valued,” CIMB said.
The house expects Top Glove to book stronger results in the fourth quarter, with net profit in the region of RM85mil to RM90mil.
This could come in on the back of stronger sales volume and lower raw material prices.
“Top Glove should also benefit from the time lag in lowering its ASPs to reflect the decline in raw materials.
“Meanwhile, new capacity from Factory 30 that has a capacity of 2.8 billion per annum, will gradually come on stream beginning August.
AmInvestment Bank (AmInvest), meanwhile, maintained its “hold” rating, with a fair value of RM5.44.
The research house said Top Glove’s share price had recently scaled its fair value of RM5.44, despite it raising its earnings earlier by 3% to 5% for FY18 to FY19 forecast to account for capacity expansions.
Similarly, AmInvest said other major glove players have also seen a surge in their share prices, mainly due to decline in latex prices in May to June, 2017.
“With lower latex prices, we could expect volume to improve in the coming fourth quarter,” AmInvest noted.
Top Glove shares closed down 12 sen or 2.14% at RM5.49 yesterday, arriving at a market capitalisation of RM6.88bil.