AmWatch - Top Glove Corporation : Valuations remain attractive BUY, 21 Oct 2015

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Top Glove Corporation : Valuations remain attractive      BUY

We reiterate BUY on Top Glove Corp with a higher fair value of RM10.60/share (vs. RM9.85/share previously). This is based on an unchanged target PE of 21x on FY16F EPS.

We came away from Top Glove’s post-result briefing and site visit (F25 and main R&D centre) yesterday more assured of the group’s prospects. We have raised our FY16F-FY18F earnings forecasts by 6%-8% following upward revisions to our utilisation rate (from 75% to 80%) and EBITDA margin assumptions (+1ppt to +2ppts).

It is currently trading at an FY16F PE of 18x – midway its 5-year PE band. With the US rate hike still on the horizon, we expect Top Glove’s valuation – and that of its peers – to overshoot in the near term. Its peers Kossan and Hartalega are presently trading at forward PEs of 26x and 28x.

As we had earlier highlighted in our results note, the group’s record FY15 earnings of RM280mil (YoY: +55%) can be attributed to a 5.5ppt-expansion in its EBITDA margin, from 14% in FY14 to 19% in FY15.

Key contributors to this include:- (1) increase in Top Glove’s sales volume backed by the strong demand (4QFY15 QoQ: +7%; FY15 YoY: +8%); (2) turnaround in its China operations from a loss of RM9.8mil in FY14 to a gain of RM4.2mil in FY15; (3) favourable product mix; (4) declining raw material prices; and (5) appreciation of the USD vs. the RM (YoY: +11%).

While the group’s DPS for FY15 of 20 sen is its highest ever, the 44% payout was below its 50% policy. We understand that the stated policy is subjected to various clauses, including the company’s projected capex and M&A activities. Our FY16F-FY18F DPS forecasts are based on a 45% payout ratio and translate to an average yield of 2.8%.

Other key takeaways from the briefing include the reduction in the tenure of its forward contracts to under 2 months from 6 months and 3 months previously, in view of the current volatility in the currency markets and management’s reiteration of its M&A interests.

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