Top Glove continues to face margin pressure


PETALING JAYA: Analysts believe that Top Glove Corp Bhd will continue to face downward pressure on margins in calendar year 2019 (CY19) as there will be an influx of glove supplies from the top rubber glove producers.

AmInvestment Bank Research said Top Glove plans to increase its capacity by 9.6 billion pieces of gloves per annum in financial year 2019 (FY19) and 10.8 billion pieces in FY20.

“CY19 will see an enlarged supply of gloves by 14%, although the expansion will come at a gradual pace. As this exceeds the organic demand growth expectation of 8%-10%, we believe average selling price (ASP) will be weighed down.

“It will take six to 12 months for demand-supply to reach an equilibrium. Hence, we opine that margins will only normalize by the end of CY19. Our net profit margin estimates are 9.3% in FY19, 9.9% in FY20 and 10.1% in FY21.”

To recap, Top Glove achieved a 27.7% year-on-year increase in revenue in the first half of financial year 2019 (1HFY19) in tandem with higher sales volume growth, while its net profit grew 0.6%.

However, its net profit margin dropped 2.4 percentage point to 8.9% as the group faced higher interest cost and tax expense in 1HFY19.

Hong Leong Investment Bank (HLIB) Research said the management highlighted that much of the pressure on margins came from the natural rubber (NR) segment, contrary to expectations that nitrile would face more ASP pressure.

Moving forward, it expects the NR segment’s ASP to be on an uptrend, but offset by downward ASP pressure from the nitrile segment.

“We adjust our FY19-21 forecast downward by -3.6% as we recalibrate our tax assumptions upward (from 15% to 18%) in line with management guidance.”

HLIB Research maintained its “buy” call on Top Glove but lowered its target price to RM5.31 from RM5.51 previously.

Meanwhile, AmInvestment Bank said it continues to like Top Glove for its expansionary plans, focus and continual efforts in improving quality and operational efficiency as well as its position as the largest rubber glove manufacturer.

“We maintain our ‘buy’ call on Top Glove with an unchanged discounted cash flow-based fair value of RM5.66 per share. At our fair value, Top Glove’s implied FY20 price-to-earning (PE) is 27.7 times.”



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