Top Glove’s core net profit above forecast, says CIMB Research

KUALA LUMPUR: Top Glove’s core net profit of RM101mil for the first quarter ended Nov 30, 2017 (1QFY18) was above expectations, at 26% of CIMB Equities Research and consensus’ FY18 estimates. 

The research house said while revenue rose 19.4% on-year, 1QFY18 core net profit grew 37.7% on-year due to: i) higher sales volume, ii) better cost efficiencies, and iii) greater economies of scale. 

“Top Glove is confident of raising its average selling prices (ASPs) further to pass on the impact of the stronger ringgit vs. US$, as well as the upcoming increase in gas prices effective Jan 1, 2018,” it said.

CIMB Research pointed out that Top Glove recently stated that it has signed a term sheet to acquire a 100% stake in Aspion Sdn Bhd for an estimated RM1.3bil to RM1.4bil that is due for completion by February 2018.  

“We are positive on this potential acquisition given: i) its earnings-accretive nature (may raise our FY18-20F EPS by 3.9-13.6%), ii) the potential synergies between both companies, and iii) Aspion adding to Top Glove’s manufacturing capabilities,” it said. 

The acquisition would turn Top Glove into the world’s largest surgical glove producer by capacity. 

The research house said it had yet to include any potential EPS upside from this acquisition pending the completion of the deal.  

CIMB Research raised its FY18-20F EPS by 3.6%-4.0% to account for higher sales volume and increase in ASPs. 

“Maintain Add, with a higher target price of RM7.92, based on 21 times CY19 P/E (from 19 times), in line with +one standard deviation of its three-year historical mean,” it said.

It said Top Glove should trade higher given: i) it is a key beneficiary of strong demand for rubber gloves as the world’s largest glove producer, ii) margin expansion from increasing economies of scale, and iii) growing manufacturing capabilities. 

Downside risks are stronger pricing competition and sharp decline in US$/Ringgit.