Top Glove expected to see stronger bottom line
KUALA LUMPUR: In tandem with the overall improved outlook for the sector, Affin Hwang Investment Bank Bhd (AffinHwang Capital) expects Top Glove Corporation Bhd (Top Glove) to see a sequentially stronger bottom line underpinned by higher average selling price (ASP).
AffinHwang Capital expected firmer sequential revenue growth for the second quarter of financial year 2017 (2QFY17), likely to be in the region of 10 per cent quarter on quarter (q-o-q).
“This is likely driven by the revision in the ASP, as well as the weaker ringgit,” the research firm said.
“The higher ASP is a reactive measure against the hefty increase in raw material prices, which has been on an uptrend since late last year with a combination of speculative as well as seasonal factors.”
Volume growth should be firmer on the progressive commissioning of Factory 6 in Phuket since November 2016, although the research firm did not expect a significant ramp-up in production output due to the relatively immaterial 1.4 billion capacity addition.
AffinHwang Capital also expected quarterly profit to be sequentially firmer in tandem with the higher revenue.
The research firm looked for 2QFY17 earnings to come in within the range of RM80 million to RM85 million, which implies nine to16 per cent in earnings growth, but is likely to be a significant decline year on year (y-o-y).
That said, AffinHwang Capital’s earlier core earnings expectation of RM397 million looked to be overly bullish; thus the research firm is trimming its earnings by 11 per cent for FY17.
The research firm was still hopeful of a stronger second half of FY17 (2HFY17) given easing pricing pressure, although the persistently high raw materials could throw a spanner in the works on margin recovery as well as the time-lag factor, which would distort earnings delivery.
Overall, AffinHwang Capital continued to favour Top Glove for the group’s strong volume growth prospects, changing product mix and decent valuations.
The research firm noted that Top Glove was currently traded at a 16-fold current year 2017 estimate (CY17E) earnings per share (EPS), still below the sector average of 18-fold.
“We expect earnings growth to resume strongly in 2018 on a favourable operating landscape on easing supply growth, which would lead to better pricing management, capacity expansion on aggressive volume growth and margin improvement on lower raw material costs and rising efficiency,” it said.
As such, AffinHwang Capital maintained ‘buy’ with a target price of RM5.80 per share.