Topglov: Earnings Normalized

Results Update

For QE31/5/2016, Topglov's net profit dropped 40% q-o-q or 14% y-o-y to RM62 million while revenue was mixed- dropped 3% q-o-q but rose 2% y-o-y to RM672 million. Revenue declined 3% q-o-q  even though the sales volume growth was 5% due to lower average selling price and weaker USD. Profit before tax declined by 44% due to the weakening of USD, intense competition in nitrile glove segment as well as the increased raw material price.

 
Table: Topglov's last 8 quarterly results


Chart 1: Topglov's last 40 quarterly results

Valuation

Topglov (traded at RM4.91 yesterday) is now trading at a trailing PE of 15.3 times (based on last 4 quarters' EPS of 32.01 sen). However, since earnings has begun to normalize, the more meaningful PER would be a forward PER. Assuming the next 3 quarters' earning will be similar to last quarter's earning, then forward EPS would be 20 sen. This will give you a forward PER of 24.5 times. This nearly matches Harta's forward PER of 25.6 times (based on its close of RM4.10 & forward EPS of 16 sen) but compares unfavorably to Kossan's forward PER of 20.3 times (based on its close of RM6.49 & forward EPS of 32 sen).

Technical Outlook

Topglov is likely to move within an upward channel, with support at RM2.50 & resistance at RM7.00. We may see a sideways movement with a downward bias for the next 3-4 years - similar to what we saw from 2010 to 2015.


Chart 2: Topglov's monthly chart as at as at Jun 15, 2016 (Source: ShareInvestor.com)

Conclusion

Based on weaker earning ahead and demanding valuation, I would revise Topglov from a HOLD to a SELL ON STRENGTH (at or above RM5.00). If you wish to stay invested in rubber glove stocks, my preference is KOSSAN.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Topglov.