Top Glove rated at Outperform by Credit Suisse on attractive valuation

Malaysia ringgit notesMalaysia ringgit notes

Credit Suisse restarted coverage of Top Glove at Outperform with a target price of 11.85 ringgit, pointing to attractive valuations.

“The disruption in China’s glove supply has resulted in a windfall for Top Glove, with recent quarterly earnings showing impressive growth and EBITDA margins rising despite weaker U.S. dollar. We expect this phenomenon to persist for at least another year,” it said in a note on Friday. EBITDA stands for earnings before interest, taxes, depreciation and amortization.

The bank noted that China’s crackdown on polluting factories has shrunk the glove supply, providing a windfall for Malaysia’s glovemakers.

“While the ban on factories has recently been lifted, most plants have either not resumed operations or productions costs have spiked up rendering them less competitive,’ Credit Suisse said.

It also noted Top Glove’s acquisition of Aspion, completed this month, is accretive, with a three-year profit guarantee from vendors, and it puts Top Glove at the forefront of the surgical glove sector, which has a high barrier to entry and superior margins.

While Credit Suisse says the stock’s recent rally has made the valuation look excessive at 23 times 2019 price-to-earnings, it added that doesn’t account for the company’s strong earnings prospects, especially after the Aspion deal. It said the market is pricing in a 17 percent return on equity for Top Glove, or a net profit level around 21 percent lower than the bank’s 2018 forecast.

It forecast a “strong” three-year earnings compound annual growth rate (CAGR) for 2017-20.

“While the weak U.S. dollar and other cost pressures are negative, we think this will be more than offset by the subdued raw material prices as well as robust demand and strong pricing power,” it said.

In late afternoon trade on Friday, the stock was up 0.20 percent at 10.22 ringgit.