We attended Top Glove’s 3QFY16 results briefing this recent Tuesday, hosted by Tan Sri Lim Wee Chai and his management team. While the share price has taken a 6% tumble post the release of its weaker QoQ results, we continue to maintain our Neutral stance the stock with an unchanged TP of RM5.52 as we still fail to see any re-rating catalysts in near term. We remain cautious on the Group’s outlook going forward, given the absence of a strengthening US Dollar effect and challenges faced, particularly intensifying competition and mounting cost pressures.

Key takeaways. Overall sales volume increased by 5% QoQ, helped by vinyl (+20%), latex powdered (+8%) and nitrile (+5%) segments. Management also explained that the deferment of its nitrile plant in Lukut, Port Dickson is mainly due to shortage of utilities. They expect the F6 and F30 plants’ commencement to be on track however. Aside from its target of at least 1 M&A exercise annually, the Group is also eyeing potential partnerships with its customers to fully leverage on its R&D capabilities to innovate on new and exclusive glove varieties. On a separate note, Top Glove is due to complete its dual listing on SGX through the sale of c.1% or SGD20m worth of shares by Tan Sri Lim Wee Chai and other associates.

Cost savings. Top Glove has commenced its internal mould production in last two months. With its internal mould supply, the Group is estimated to save about 10% of its total mould costs, amounting to c.RM2m. We are positive on this move given the shortage of glove formers, while the Group is also able to control the quality and consistency in its delivery times without affecting production.

Maintain Neutral. We see the recent share price weakness as a result of its weak QoQ results announced last week. We continue to maintain our Neutral stance the stock however, with an unchanged TP of RM5.52 as we still fail to see any re-rating catalysts in near term. Mitigating factors would be i) improvement in nitrile ASP which has been on the rise since May, ii) a reversal of latex prices (downwards) after the wintering season. We remain cautious on Top Glove’s outlook given challenges faced such as uncertainty of forex movements and mounting cost pressures. Downside risks to our earnings estimates include further weakening of the US Dollar, further weakness in its ASP amid heightened competition, and any deferment on its expansion plans.

Source: PublicInvest Research - 23 Jun 2016