Streets
opine the worst should be over for the stock and the company should
record sequentially stronger earnings ahead from Jan 2017.
Top
Glove has highlighted that the operating environment has improved with
the appreciation of the US dollar-ringgit (Till 20 Jan 2017) post-Trump
victory.
Furthermore, the demand for gloves has remained robust as the total utilisation rate stands at between 82% and 85%.
Another
key highlight was the price revisions it implemented in the first
quarter of financial year 2017 (1QFY17). The ability to raise prices
while utilisation rates have remained healthy signifies that pricing
competition has eased. The
group raised latex gloves’ ASPs by an estimated 10% to 13%
quarter-on-quarter (q-o-q) in 1QFY17, while observers estimate it raised
nitrile gloves’ ASPs by 4% to 5%.
Despite
the favourable US dollar-ringgit benefitting the group, it is positive
that the group is able to raise its ASPs to pass on the increase (Till
20 Jan 2017) in raw material prices (latex increased 34% q-o-q, nitrile
butadiene increased 26% q-o-q). However, management did not discount the possibility of further ASP hikes given the spike in latex prices till 20 Jan 2017.
Overall,
industry observers believe the latex prices at current levels (20 Jan
2017) are unsustainable as the spike in latex prices can be attributed
to a supply shortage due to floods in Southern Thailand, the supply is
expected to improve going forward from Jan 2017 with reports of the
floods subsiding.
Furthermore,
speculative demand from a spike in China car sales is unlikely to
continue into 2017, as China lowered tax cuts for vehicle purchases to
5% from 10% in 2016.
Topglove
plans to add 6.2 billion per annum (12% increase) in capacity in 2017.
Although this looks aggressive at this juncture, management has
highlighted plans to stagger the new incoming capacity to allow for
better supply and demand dynamics.
Its
4.4 billion plant (due April 2017) is expected to come onboard
throughout the whole year. On the other hand, the commercial production
of Phase 1 of F31 (1.4 billion per annum) can potentially be deferred to
1Q18.
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