This article first appeared in The Edge Financial Daily on October 20, 2017 - October 26, 2017
Top Glove Corp Bhd
(Oct 19, RM6.40)
Maintain add with an unchanged target price (TP) of RM6.90: We attended Top Glove Corp Bhd’s briefing to analysts, media and bankers on Tuesday to share more details about its recent quarterly results and future plans.
Overall, we are more positive following the briefing as the group: i) indicated that demand remains robust due to closure of several glove factories in China; ii) guided for the effective tax rate to remain low at 15% in forecast financial year 2018 (FY18F); and iii) indicated plans to announce a major acquisition soon. It targets to grow its share in the glove market to 30% in 2020, from 25% currently.
We understand that several vinyl glove plants in China closed down in the first half of 2017 due to more stringent environmental regulations by the Chinese government. The factory closures are expected to last until necessary measures to upgrade the plants to control pollution are undertaken.
This has resulted in a shortage of vinyl glove supply, which has consequently helped spur demand for gloves. We expect this, coupled with relatively stable latex prices and exchange rates, to spur demand for gloves in FY18.
Top Glove is fairly confident of sustaining its pre-tax profit margin of 11.2% achieved in FY17, which is at the mid-range of its pre-tax profit margin for the past eight years. This is conservative relative to our pre-tax profit margin projection of 12.2% for FY18F.
The group guided for the effective tax rate to be at around 15% in FY18. This is lower than our current effective tax rate forecast of 16% for FY18F, and as such, there could be potential upside to our net profit projection for FY18F if it achieves the lower effective tax rate.
The group revealed that it is looking to close a deal for a potential acquisition within the next month. We are of the view that the potential acquisition target is likely to be related to the rubber glove industry, in line with the group’s strategy.
Local newspaper The Star indicated that the acquisition may cost up to RM1 billion. We are currently neutral on this news pending more details. Top Glove should be able to afford the acquisition as it was in a net cash position of RM70.6 million as at Aug 31, 2017.
Top Glove announced last week that it is acquiring a 100% stake in packaging company Eastern Press Sdn Bhd (EPSB) for RM47.25 million cash. Following the acquisition, EPSB will supply 45% of the group’s internal requirement of inner boxes.
Overall, we are positive on this deal as we are of the view that: i) this acquisition will be value accretive to Top Glove; and ii) the acquisition price for the asset is attractive. Based on the profit guarantee, we estimate EPSB is valued at 10.5 times FY18F price-earnings ratio.
We maintain our earnings forecasts, TP of RM6.90 (based on 19 times 2019 earnings per share) and “add” rating. We believe Top Glove will be a prime beneficiary of strong growth in demand for gloves, thanks to its plans to boost its capacity by 15% by December 2018. This, coupled with stable raw material costs, bodes well for its FY18F earnings. — CIMB Research, Oct 18