Top Glove Corp Bhd
(Oct 19, RM5.00)
Downgrade to hold with a lower target price of RM4.30: Top Glove Corp Bhd is trading at 18.9 times financial year ending Aug 31, 2017 (FY17) earnings per share, which is unjustified as upside in foreign exchange gains is diminishing, competition among glove players is intensifying especially in the nitrile segment, and operating costs are rising from natural gas hike and higher raw material prices.

Top Glove is planning to be a market leader in the nitrile glove segment. It is increasing capacity in the nitrile glove segment. The expansion plans are underway such as Factory 6 in Thailand (commencing in November 2016), Factory 30 in Klang (April 2017) and Factory 31 in Klang (Phase 1 in August 2017, Phase 2 in May 2018), and will raise total production capacity to 58.8 billion gloves per annum (+26% from current capacity of 46.6 billion per annum).

We forecast earnings before interest and tax (Ebit)/1,000 gloves to decrease by 20% year-on-year to RM9.14 in FY17, as we factor in higher operating costs and diminishing US dollar gains. Our Ebit/1,000 gloves assumptions are conservative vis-à-vis the record-breaking level in FY16, as we expect Ebit/1,000 gloves to normalise in FY17 to FY19.

Competition is heating up in the glove sector with several glove makers expanding aggressively. This could result in higher pressure on margins. — AllicanceDBS Research, Oct 19