Pricey valuation; D/G to SELL

Top Glove’s share price has risen a sharp 21% in one month on optimism of a strong earnings recovery. However, we expect its upcoming quarter earnings to be flattish QoQ (but a substantial fall YoY). There is also downside risk to street’s FY17-18 earnings forecasts. Valuation is pricey at 19x CY17 PER (+1SD to mean). We downgrade the stock to SELL (from HOLD) with an unchanged TP of MYR4.10 on 15x 2017 PER (mean PER).

Expect flattish 4QFY16 earnings

Top Glove’s 4QFY8/16 results is due to release next Wed (12 Oct) and we expect a net profit of around MYR65m (+4% QoQ, -37% YoY), in-line with ours and market’s expectations. We think 4QFY16 earnings could be flattish QoQ as: (i) the positive impact from higher ASPs (+5-10% QoQ) and decline in latex price (-3% QoQ) were offset by the higher costs from minimum wage and gas tariff hikes (+11% and +6% in Jul 2016); (ii) sales volume was flattish QoQ on zero capacity growth.

Better operating environment factored in

While the operating environment has improved on slower capacity expansion in the industry, this has already been factored into our earnings forecasts, which project for gradual quarterly earnings recovery in FY17. Our earnings forecasts have also imputed for its near-term capacity growth; plant F27 has started its trial run and full commercialization is targeted by Dec 2016 (+5% to 46.6b pcs p.a.).

Pegging to mean valuation

We maintain our earnings forecasts; on a full-year basis, we project its EPS to fall 13% in FY17 as there were two quarters of USD/MYR-fuelled supernormal earnings in FY16. Our earnings forecasts assume sales volume growth of 7%/8% and average USD/MYR rate of 4.00 for FY17-18 respectively. As we expect Top Glove’s earnings recovery to be gradual, we continue to peg the stock at its historical mean PER of 15x.

Source: Maybank Research - 6 Oct 2016