Top Glove expected to report record 1QFY16 results

by **Cals** Thu 03 Dec 2015, 23:26

Top Glove expected to report record 1QFY16 results

By RHB Research Institute / The Edge Financial Daily | December 3, 2015 : 10:12 AM MYT

This article first appeared in The Edge Financial Daily, on December 3, 2015.

[You must be registered and logged in to see this image.][size=16]Top Glove Corp Bhd ( Valuation: 1.10, Fundamental: 2.50)
(Dec 2, RM10.00)
Maintain buy with a higher target price (TP) of RM11.61: We came away from our recent company visit feeling more assured about the company’s prospects. We believe that Top Glove Corp Bhd will report yet another record set of earnings in the first quarter ended Nov 30, 2015 (1QFY16) on the back of higher sales volume and margin expansion. Maintain “buy” with a higher TP of RM11.61 (from RM10.12, 20% upside).

We expect 1QFY16 earnings to grow 7% to 10% quarter-on-quarter (q-o-q) on the back of higher sales volume and margin expansion. We forecast revenue for the quarter to grow 2% to 5% on the back of a better-than-expected increase in sales volume, as well as stronger average selling price (ASP) assumptions.

The management has guided that net margin for the quarter improved q-o-q due to better operational efficiency, a more favourable product mix, a 10.9% strengthening of the US dollar against the ringgit, and a 12% to 14% decrease in raw material prices. We estimate that net margin will likely improve to 15.2% in 1QFY16 (4QFY15: 14.5%). Consequently, we expect 1QFY16 earnings to be around RM110 million to RM115 million (4QFY15: RM103.1 million), 15% to 20% higher than consensus estimate. Top Glove’s earnings results are expected to be released on Dec 15.

We revise our cost of equity to 8.3% (from 9%), as we believe that investors have accorded a higher scarcity premium to the rubber product sector. We opine that this is due to a dearth of robust earnings growth opportunities amid a subdued macroeconomic environment (note that RHB ([You must be registered and logged in to see this image.] Valuation: 1.65, Fundamental: 1.40)’s 2016 Malaysian gross domestic product forecast has been downgraded to 4.6% from 4.9%). As such, we believe that Top Glove (15.4% earnings compound annual growth rate from FY16 to FY18) would stand out on the back of its attractive growth opportunities.

We raise our FY16 to FY18 earnings forecasts by between 10% and 12% after adjusting for better-than-expected sales volume, ASP as well as margin assumption. We continue to be impressed by Top Glove’s earnings resilience. Maintain “buy” with a higher discounted cash flow-derived TP of RM11.61 (20% upside, cost of equity: 8.3%, term growth: 2%), with an implied FY16 forecast (FY16F) price-earnings ratio (PER) of 19.7 times. We believe that Top Glove, which is currently trading at 16.5 times FY16F PER, will close the 23% valuation gap to the sector average of 20.2 times.

The key risk to our recommendation would be the de-rating of the sector driven by liquidity, should investors switch out of non-cyclical stocks on signs of abating market uncertainty. — RHB Research Institute, Dec 2
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