PETALING JAYA: Top Glove Corp Bhd, whose net profit fell 36.5% in the third quarter ended May 31, 2019 (3Q FY19), is expected to achieve better results moving forward, said analysts.
On Tuesday, the group said its net profit fell to RM74.67 million during the quarter from RM117.57 million a year ago due to a surge in natural rubber latex price and strong competition.
For the nine-months period, net profit was 12.5% lower at RM290.51 million from RM332.03 million a year ago.
CGS-CIMB said the worst is over for Top Glove as quarterly earnings may have bottomed during the quarter and expects the group to post stronger results ahead.
“Our optimism is premised on commissioning of new glove production capacity, tailwinds from weaker ringgit versus US dollar, improved supply-demand dynamics from better absorption of new glove supply and higher selling prices to reflect the recent increase in latex prices,” it said in its report today.
“In addition, we expect Aspion Sdn Bhd to record sequentially stronger results, backed by higher production output and better economies of scale,” it added. Aspion is a surgical glovemaker acquired by Top Glove last year.
CGS-CIMB lowered its FY19-21 EPS estimates by 2-15.6%, to account for higher latex prices, an increase in tax rates and lower average selling prices (ASP) for gloves due to pricing competition.
It maintained its “add” rating on the stock with a higher target price of RM5.20 from RM5.08 previously. Despite the weak 3Q FY19 results, it believes that any sell-down is a buying opportunity as the worst is over for Top Glove.
“We believe Top Glove remains attractive due to the defensive nature of its business, its position as the world’s largest glove maker and it is a beneficiary of potential tailwinds from weak ringgit to US dollar and higher glove demand from spillover effects of the US-China trade war,” said CGS-CIMB.
MIDF Research also expects an improved 4Q FY19 performance for the natural rubber glove segment as the effect of upward revisions in ASP will be reflected then.
The price of natural rubber latex recently subsided by 0.8% to RM4.67 per kg and given the slow demand, MIDF Research does not expect any further significant uptrend in the price. Furthermore, Top Glove will add more than 14.2 billion pieces of nitrile glove production capacity per annum by end-2020.
“At the end of this two-year plan, the group will become the largest manufacturer of nitrile glove with total production capacity of more than 30 billion pieces per annum. While the aggressive expansion in production capacity among glove manufacturers has resulted in pricing pressure, we expect this will be offset by a higher sales volume,” it said.
It revised its FY19 downward by 14.7% year-on-year to take into account the unexpected significant rise in natural rubber latex price in 3Q FY19 while FY20 has been revised marginally lower by 0.8%.
MIDF Research maintained its “neutral” recommendation with a lower target price of RM4.70 from RM4.75 previously.
Meanwhile, Affin Hwang Capital expects margins to recover in the subsequent quarters as Top Glove has raised prices by 17% to pass on the higher cost.
It downgraded Top Glove to “hold” from “buy” previously, with a lower price target of RM4.70 from RM4.90 previously. It also cut its EPS for FY19-21 by 2.8-12.8% to factor in the weaker 3Q FY19.
