AmWatch - Top Glove Corporation : A stellar FY15 BUY, 16 Oct 2015

STOCK FOCUS OF THE DAY

Top Glove Corporation : A stellar FY15    BUY

We reiterate BUY on Top Glove Corp with a higher fair value of RM9.85/share (vs. RM9.30/share previously) following its better-than-expected FY15 results. Our fair value is based on an unchanged target PE of 21x on upward revised FY16F earnings. Top Glove reported a solid 4QFY15 net profit of RM103mil (QoQ: +43%; YoY: +123%) to lift its FY15 earnings by 55% YoY to RM280mil. The results, which were its best ever on both a quarterly and full-year basis, came in ahead of our and consensus estimates by ~12%. A final single-tier dividend of 12sen/share was also recommended. This brings its total dividends for FY15 to 20sen/share, which is 25% above FY14’s 16 sen/share. At the current price, its yield is ~2.4%. In view of its strong performance, the group had also proposed a 1-for-1 bonus share issue. While this exercise will not have an impact on Top Glove’s valuations/fundamentals, it will improve the stock’s trading liquidity and further enhance its appeal.

The positive earnings variance vis-à-vis our forecast can be attributed to the improved operating environment, which enabled most of the increase in its revenue (YoY: +10%) to filter down to its bottom line. In FY15, EBITDA margin had jumped by 5.5ppts to 18.6% –  a tad short of its peak of 19% recorded in FY09. In addition to robust global glove demand (sales volume +8% YoY), turnaround of its China operations, soft raw material prices (YoY: -17% for NR and -2.8% for NBR) and internal quality and efficiency improvements, a key factor to the margin expansion was the appreciation of the USD against the RM (YTD: +19%).

All in, we have raised our FY16F-FY17F earnings estimate for Top Glove by ~9% to reflect its improved margins and earnings growth momentum. We expect margins to remain stable moving forward as we do not foresee any cost surprises and that ASP will be supported by healthy global glove demand (+6% to +8%). 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 and thus deem its current valuation to be attractive. The recent bonus issue proposal should also provide further bounce to its share price.

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Others :

TSH Resources : Young trees to sustain long-term growth             BUY

Hong Leong Bank : Displaying a high level of confidence                 HOLD

Eco World Development : BBCC set for 1Q16 launch         HOLD

QUICK TAKES

Genting Plantations : Buys land from GenM for RM65.8mil           BUY

Puncak Niaga : It is done               HOLD

IHH Healthcare : Joins JV to operate hospital in Chengdu               HOLD

NEWS HIGHLIGHTS

Sunway Construction : Bags RM174mil housing project

Eco World Development : On track to achieving RM3bil sales target

Property Sector : DIBS proposed for first-timers

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.