Top Glove Corporation

Transcription

1 Malaysia Company Guide Version 6 Bloomberg: TOPG MK Reuters: TPGC.KL Refer to important disclosures at the end of this report DBS Group Research. Equity 19 Jun 2017 HOLD Last Traded Price ( 16 Jun 2017): RM5.61 (KLCI : 1,791.31) Price Target 12-mth: RM5.30 (-6% downside) (Prev RM4.80) Analyst Siti Ruzanna MOHD FARUK sruzannamf@alliancedbs.com What s New 3QFY17 earnings up 24% y-o-y; results are below expectations Awaiting for better days Maintain HOLD. We maintain our HOLD call for Top Glove with a higher TP of RM5.30. We believe near-term earnings will be supported by the higher ASP albeit at a lower volume. Raw material prices which have been trending down will see an ease in ASPs and hence higher volume for the upcoming quarters. FY18 will be a better year as we expect better volumes from higher demand coupled with incoming capacity (+12%). Earnings were affected by lower volume and higher operating costs Adjusted earnings by -6%/+1%/+2% for FY17/18/19F Maintain HOLD with TP of RM5.30 Expansion still ongoing. Top Glove is gearing up to increase its nitrile glove segment by increasing its capacity in this segment. The expansion plans are underway such as Factory 30 in Klang (to commence in July 2017), Factory 33 and Factory 34 (August 2017), Factory 31 (January 2018) and Factory 32 (December 2018) which will raise total production capacity to 60.0bn gloves p.a. (+25% from current capacity). Price Relative RM Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 (LHS) Relative KLCI (RHS) Relative Index Forecasts and Valuation FY Aug (RM m) 2016A 2017F 2018F 2019F Revenue 2,889 3,360 3,676 3,866 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) 28.9 (10.5) EPS (sen) EPS Pre Ex. (sen) EPS Gth Pre Ex (%) 28 (10) 18 9 Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): (6) 1 2 Consensus EPS (sen): Other Broker Recs: B: 11 S: 1 H: 11 Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P Profitability to normalise in FY17/18F. We forecast EBIT/k gloves to decrease in FY17F, as we factor in higher operating costs and lower volume. We believe the exceptional 1H16 showing will not be replicated given the unfavourable conditions. Our EBIT/k glove assumptions are conservative vis-à-vis the record-breaking level in FY16, as we expect EBIT/k gloves to normalise in FY18-19F. Valuation: Maintain HOLD. We maintain our HOLD recommendation with a TP of RM5.30. Our TP is based on 17x CY18F EPS which is +0.5SD of its 5-year mean EPS. Our PE multiple reflects its near term earnings growth. Key Risks to Our View: Rising competition could erode margins. Competition is heating up in the glove sector with several glove makers expanding aggressively. This could results in higher pressure on margins. At A Glance Issued Capital (m shrs) 1,254 Mkt. Cap (RMm/US$m) 7,033 / 1,645 Major Shareholders (%) Wee Chai Lim 29.4 Kumpulan Wang Persaraan (KWAP) 9.0 Firstway United 5.1 Free Float (%) m Avg. Daily Val (US$m) 3.5 ICB Industry : Health Care / Health Care Equipment & Servic ed: TH / sa:bc, PY

2 WHAT S NEW Earnings below expectations 3QFYAug-17 earnings up 24% y-o-y Top Glove booked a net profit of RM77.7m in 3QFY17 (+24.4% y-o-y; -6.4% q-o-q) which brings the 9MFY17 figure to RM234.1m. This made up 67.8%/68.2% of our/consensus full-year estimates which we deem to be below expectations. Top Glove declared its first interim DPS of 6.0 sen, which is in line with expectations. Results review 3QFY17 recorded revenue of RM869.6m (+29.4% y-o-y; +2.1% q-o-q) despite a contraction in sales volume (-1.0% y- o-y; -4.4% q-o-q). Better revenue was contributed by a higher ASP (+15.0% y-o-y; +4.6% q-o-q) as the company passed down the higher raw material prices to customers. The average natural rubber latex price surged to RM7.06/kg (+79.2% y-o-y; +18.7% q-o-q) while that for nitrile latex went up to US$1.34/kg (+54.8% y-o-y; +22.4% q-o-q). EBIT/k gloves came in at RM9.71 (+36.7% y-o-y; -5.1% q-oq). We believe EBIT/k gloves declined q-o-q due to time lag in passing on higher raw material prices. We expect EBIT/k gloves to be better going forward as ASPs are adjusted accordingly. This is coupled with continuous internal enhancements that resulted in efficiency gains. Making adjustments to earnings We cut our FY17F numbers to reflect the lower volume and margin compression from the surge in raw material prices. We remain positive on FY18F/19F as revision in ASP following the downtrend of raw material prices (latex price has dropped by 11% to RM5.62/kg since early June 17) may increase sales volume coupled with the incoming capacity. Premised on this, we have adjusted our EBIT/k gloves by - 3.4%/+2.5%/+2.5% to RM9.43/RM10.03/RM10.01 for FY17F/18F/19F. As for volume, we have decreased FY17F sales volume by 3.7%. This resulted in our earnings to be adjusted by 6.5%/+1.3%/+1.7% for FY17F/18F/19F. Outlook Acquisition of two factories; Factory 33 and Factory 34 Top Glove signed an SPA at the end of May to acquire two factories namely Factory 33 and Factory 34, with a total capacity of 1.4bn gloves p.a. They plan to carry on with existing capacity at these factories while upgrading works are still in planning stage. We note that both factories generate revenue of RM150m p.a. with net margins of 2-3%. This will be reflected in FY18 but incremental earnings are minimal at 1-2%. Completion of upgrade works and increased efficiency will be the key factors for the two factories to have more meaningful impact on earnings. Steady on expansion The expansion plans are already underway with the recent completions of Factory 27 in Lukut (commenced operations in August 2016) and Factory 6 in Thailand (November 2016), which bring its total capacity to 48.0bn gloves p.a. Other expansions include Factory 30 in Klang (to commence in July 2017), Factory 33 and Factory 34 (August 2017), Factory 31 (January 2018) and Factory 32 (December 2018) which will raise total production capacity to 60.0bn gloves p.a. (+25% from current capacity). Valuation We maintain HOLD on Top Glove with a higher TP of RM5.30 as we roll forward our base year to CY18. Our TP is based on a target PE multiple of 17x CY18F PE. Page 2

3 Quarterly / Interim Income Statement (RMm) FY Aug 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq Revenue Cost of Goods Sold (558) (701) (736) Gross Profit (11.3) Other Oper. (Exp)/Inc (48.1) (50.7) (43.0) (10.6) (15.1) Operating Profit (9.3) Other Non Opg (Exp)/Inc nm nm Associates & JV Inc (0.1) nm (205.3) Net Interest (Exp)/Inc (78.2) (56.6) Exceptional Gain/(Loss) nm nm Pre-tax Profit (10.9) Tax (11.0) (19.5) (14.0) 27.3 (28.5) Minority Interest (0.3) (0.2) 0.16 nm (210.8) Net Profit (6.4) Net profit bef Except (6.4) EBITDA (6.3) Margins (%) Gross Margins Opg Profit Margins Net Profit Margins Source of all data: Company, AllianceDBS Top Glove's expansion plans No. of productions Capacity gloves p.a. Glove Type lines (bn) Current: 26 glove factories 499 lines 48.0 Target commence operations by Expansion in progress: F30 (Klang, Malaysia) Nitrile 28 lines 2.8 July 2017 F31 (Klang, Malaysia) Nitrile 30 lines 3.0 January 2018 F32 (Klang, Malaysia) Nitrile 48 lines 4.8 December 2018 F33 (Nilai, Malaysia) Natural rubber 16 lines 1.1 August 2017 F34 (Muar, Malaysia) Natural rubber 6 lines 0.3 August 2017 Total expansion by December lines 12.0 Total by December lines 60.0 Source of all data: Company, AllianceDBS Page 3

4 CRITICAL DATA POINTS TO WATCH Top Glove currently operates 26 glove factories with the capacity to produce 48.0bn gloves p.a. including the latest expansion in Factory 6 Phuket. It is planning a Factory 30 in Klang (to commence in July 2017), Factory 33 and Factory 34 (August 2017), Factory 31 (January 2018) and Factory 32 (December 2018). Together, these expansion projects comprising more than 128 production lines will raise the group s annual capacity to 60.0bn gloves. Premised on the expected completion dates provided by the management, we expect Top Glove to grow its effective annual capacity by 8%/12%/5% in FY17/18/19F. Sales volume to grow at 7.4% CAGR. We expect the group s utilisation rate to decline marginally by 2.0ppts each in FY17F and remain flat in FY18F/19F. The incoming capacity of 5.2bn will keep utilisation rate low at 80% for FY18F. Premised on this, we expect Top Glove to grow its sales volume by 5%/12%/5% in FY17/18/19F. This translates into a 3-year CAGR of 7.4%, which is in line with expected consumption growth of 6-8% p.a. EBIT/k gloves is a better metric to assess profitability. We assess Top Glove s profitability by looking at unit profitability (i.e. EBIT/k gloves), rather than profit margins. This is because profit margins can fluctuate even if there is no change in underlying profitability, because of its cost pass-through pricing (which lags by 1-2 months). Under the pricing mechanism, profit margins can rise when costs are falling (i.e. same level of profits on lower ASP), and margins can drop when costs are rising (i.e. same level of profits on higher ASP), with no impact on the bottom line. EBIT/k gloves to normalise. EBIT/k gloves increased by 9% in FY16 backed by the strengthening of the USD coupled with the lower raw material prices. However, we expect EBIT/k gloves to decline by 17% to RM9.43 in FY17F as a result of increasing competition among glove players especially in the nitrile segment, and rising operating costs from natural gas hike and raw material prices. Thereafter, following the downtrend of raw material prices and better supply-demand dynamics, we assume Top Glove s EBIT/k gloves to increase by 6% in FY18F. Gain from incoming nitrile. The recent capacity expansion has been geared towards nitrile gloves as the company believes there will be stronger demand for nitrile gloves. Current product mix stands at 65:35 (natural rubber: nitrile). This could move towards 60:40 once incoming capacity kicks in. We expect Top Glove's earnings to improve from its expansion in nitrile gloves as they offer better margins. Source: Company, AllianceDBS Capacity (bn gloves) Utilisation rate (%) Sales Volume (bn gloves) EBIT/k gloves (RM) Page 4

5 Balance Sheet: Solid balance sheet. Top Glove is a strong cash generator, and we expect the group to remain in net cash position in FY17-19F. Backed by rising operating cash flow of RM431m-530m amid limited capex of RM200m p.a. over FY17-19F, we expect the cash pile to rise from RM224m in FY16 to RM518m by FY19F. In addition, the group has significant short-term investments (RM480m in FY16) which can be liquidated when required. The large cash pile should be sufficient to fund Top Glove s dividend payments and any M&A opportunities that may arise Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) Share Price Drivers: Increased market volatility. Malaysian-listed glove makers have been generally regarded as defensive and a safe haven by investors, given their resilient earnings outlook backed by: (1) the cost pass-through mechanism, (2) stable demand for medical glove products, and (3) exposure to global markets (not dependent on a single geographical region). As such, share prices in the sector tend to react favourably during periods of increasing market volatility. Earnings outlook. Top Glove s earnings are a function of two variables: (1) sales volume, and (2) unit profitability (EBIT/k gloves). We do not expect Top Glove s sales volume growth to exceed 6-8% p.a., except during periods of abnormal demand (i.e. pandemic outbreaks). Unit profitability is influenced by the competitive environment, productivity, and macroeconomic factors (i.e. currency movements, raw material prices, etc.) RMm % 15.0% 10.0% Capital Expenditure Capital Expenditure (-) ROE (%) Key Risks: Rising competition could erode margins. Competition is heating up in the glove sector with several glove makers undertaking aggressive expansion plans, which could see unit profitability (EBIT/k gloves) suffer going forward. However, Top Glove will be relatively better off than its peers, as its core natural rubber glove products will see relatively less competition than nitrile gloves, because of better supplydemand dynamics. Company Background Top Glove is the world s largest rubber glove manufacturer with an annual production capacity of 48.0bn gloves. Natural rubber gloves make up the lion s share of its product mix (63%), while nitrile rubber gloves account for 30%. Vinyl and surgical gloves account for the rest. Currently, the group s manufacturing facilities are located in Malaysia, Thailand, and Indonesia. 5.0% 0.0% Forward PE Band (x) (x) Jun-13 Jun-14 Jun-15 Jun PB Band (x) (x) +2sd: 23.8x +1sd: 19.8x Avg: 15.7x -1sd: 11.6x -2sd: 7.6x +2sd: 4.35x Jun-13 Jun-14 Jun-15 Jun-16 Source: Company, AllianceDBS +1sd: 3.64x Avg: 2.93x -1sd: 2.21x -2sd: 1.5x Page 5

6 Key Assumptions FY Aug Capacity (bn gloves) Utilisation rate (%) Sales Volume (bn gloves) EBIT/k gloves (RM) Income Statement (RMm) FY Aug Revenue 2,511 2,889 3,360 3,676 3,866 Cost of Goods Sold (1,956) (2,293) (2,812) (3,038) (3,202) Gross Profit Other Opng (Exp)/Inc (200) (180) (187) (206) (211) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (11.7) Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax (82.4) (79.8) (71.5) (84.4) (91.9) Minority Interest (1.4) (1.7) (1.7) (1.7) (1.7) Preference Dividend Net Profit Net Profit before Except EBITDA Growth Revenue Gth (%) EBITDA Gth (%) (8.0) Opg Profit Gth (%) (13.0) Net Profit Gth (Pre-ex) (%) (10.5) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Source: Company, AllianceDBS Page 6

7 Quarterly / Interim Income Statement (RMm) FY Aug 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue Cost of Goods Sold (558) (607) (647) (701) (736) Gross Profit Other Oper. (Exp)/Inc (48.1) (45.1) (52.2) (50.7) (43.0) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (0.9) 0.06 (0.1) Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit Tax (11.0) (9.9) (16.1) (19.5) (14.0) Minority Interest (0.3) (0.2) (0.3) (0.2) 0.16 Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (3.1) EBITDA Gth (%) (38.3) (6.3) Opg Profit Gth (%) (46.6) (9.3) Net Profit Gth (Pre-ex) (%) (40.3) (6.4) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (RMm) FY Aug Net Fixed Assets 1,067 1,196 1,276 1,343 1,396 Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 2,688 2,649 2,855 3,108 3,357 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity 1,608 1,818 1,946 2,165 2,389 Minority Interests Total Cap. & Liab. 2,688 2,649 2,855 3,108 3,357 Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) Z-Score (X) Source: Company, AllianceDBS Page 7

8 Cash Flow Statement (RMm) FY Aug Pre-Tax Profit Dep. & Amort Tax Paid (55.6) (98.5) (71.5) (84.4) (91.9) Assoc. & JV Inc/(loss) 11.7 (1.3) (1.3) (1.3) (1.3) Chg in Wkg.Cap. (67.2) 25.6 (41.0) (31.0) (17.9) Other Operating CF (15.8) (42.2) Net Operating CF Capital Exp.(net) (200) (217) (200) (200) (200) Other Invts.(net) (524) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF (642) (34.4) (200) (200) (200) Div Paid (105) (169) (195) (163) (192) Chg in Gross Debt 364 (198) Capital Issues Other Financing CF Net Financing CF 262 (328) (195) (163) (192) Currency Adjustments Chg in Cash (42.5) Opg CFPS (sen) Free CFPS (sen) Source: Company, AllianceDBS Target Price & Ratings History RM S.No. Date of Report Closing Price 12-mth T arget Price Rating 1: 23 Jun BUY 2: 13 Oct BUY 3: 19 Oct HOLD 4: 07 Nov HOLD 5: 16 Dec HOLD 6: 20 Dec HOLD 7: 29 Dec HOLD 8: 06 Jan HOLD 9: 09 Jan HOLD 10: 17 Mar HOLD 3.99 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Note : Share price and Target price are adjusted for corporate actions. Source: AllianceDBS Analyst: Siti Ruzanna MOHD FARUK Page 8

9 AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 19 Jun :08:20 (MYT) Dissemination Date: 19 Jun :47:20 (MYT) Sources for all charts and tables are AllianceDBS unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''). 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