Top Glove kept on ‘hold’ but with higher fair value

PETALING JAYA: AmInvestment Bank has maintained its “hold” call on Top Glove Corp Bhd with a higher fair value of RM6.22 from RM5.44 previously despite tweaking its FY17F net profit downwards.

The group’s share price lost half a sen to close at RM5.68 yesterday, with some 887,100 shares changing hands.

“We forecast Top Glove’s revenue to grow by 16% in FY18F underpinned by a 13% increase in production volume. Top Glove’s production capacity is expected to expand by 11% from 48 billion in FY17F to 53 billion pieces in FY18F on the back of contribution from four new factories,” it said in a report yesterday.

It expects global glove demand growth to be healthy at 6-8% per annum due to emergence of new health threats and increasing hygiene standards and healthcare awareness.

AmInvestment Bank estimates Top Glove’s earnings before interest, tax, depreciation and amortisation (ebitda) margin to be relatively unchanged at 14% in FY18F and that selling prices would be stable in line with the costs of nitrile and latex.

“If the costs of raw materials rise, Top Glove would be able to pass on about 70-80% of the costs in the form of higher selling prices,” it added.

Nitrile and latex account for about 50% of Top Glove’s production costs and it takes about one to two months to adjust the selling prices.

Earnings risk is expected to come from the proposed increase in foreign worker levy from RM1,200 to RM1,800 per worker, which Top Glove may have to absorb and this may take place in the beginning of 2018.

The levy for foreign workers could reduce Top Glove’s FY18F net profit by 3-4%. Note that the company has 7,000 foreign workers currently.

However, the recent hike of 0.57% in the average effective natural gas tariff from RM26.57/MMBtu to RM26.31/MMBtu is not expected to have material impact on Top Glove’s operating profit margin. Gas accounts for 8% of the company’s production costs.

AmInvestment Bank said the company’s presence in China would be boosted by the recent acquisition of two factories in Nilai and Muar while the addition of three new manufacturing facilities in Klang would improve its nitrile capacity.

The new factories and manufacturing facilities are expected to help Top Glove achieve a more balanced product mix, that is, 40-50% of products to come from nitrile gloves in the future, which is consistent with global demand.

Presently, nitrile makes up 37% of Top Glove’s glove products while powder-free gloves account for another 20%.