- We maintain our BUY recommendation on Top Glove Corp with a revised fair value of RM7.15/share (from RM6.50/share) as we roll forward our base year to FY14F. We now peg our fair value to a PE of 20x, 0.5SD above its current 5-year mean of 18x.

- Top Glove posted a higher 9MFY13 net profit of RM148mil (+7% YoY) on the back of a 4% YoY rise in revenue. The results were within ours, but 6% short of street estimates. Our FY13F earnings forecast is ~8% below consensus’ RM231mil.

- Stripping out the RM10.9mil unrealised forex losses (EI) on its USD forward contracts and AUD fixed income investments in 3QFY13, its 9MFY13 YoY earnings growth would have doubled to 16% while its QoQ net loss would have been a mere 1.1% (vs 20% before). We reckon that a reversal could be on the cards, eg. in FY12, should these exchange rates remain stable in the final quarter.

- The group’s 5% QoQ topline growth was supported by a 7% growth in sales volume, led by its nitrile variants (QoQ: +13% to form 18% of Top Glove’s product mix). This had more than offset the declines in ASP due to greater price competition in its bread-and-butter latex segment (75% of sales volume).

- As Top Glove did not pass on any cost escalations from the adverse forex movements and rising raw material prices (QoQ: latex +3.6% and nitrile:+2.5%) in 3QFY13, its EBITDA margin (excluding the EI loss) was compressed by 2ppts QoQ to 12%. In addition, downtime from upgrading works at its factories had resulted in lower efficiencies.

- Nonetheless, we expect the group’s FY13F-FY15F EBITDA margins to hover around its historical average of 14% given its plants being nearly fully automated (presently 80%), its firmwide IT transformation’s (SAP ERP application) Sept 2013 rollout as well as rising nitrile gloves in its product mix.

- We note that Top Glove has made further inroads in the North American market, which is dominated by nitrile gloves, in the last quarter (revenue +2ppts QoQ to 29%). We reckon this may be due to rising orders from MNCs given the group’s intention to dedicate certain lines from its new factories to the manufacturing of their products.

- As expected, management declared a first single tier interim dividend of 7 sen per share, matching 3QFY12’s payout quantum-wise. This amount makes up 41% of our FY13F gross DPS forecast, which is premised on a 50% payout ratio as per management’s guidance.

- Looking ahead, we believe the group’s FY13F-FY15F earnings will continue to be underpinned by:- (1) resilient global glove demand (FY14F:+12%); (2) favourable raw material prices; and (3) its position as the prime beneficiary of potential pandemics, eg. H7N9 and MERS-CoV given its larger installed capacity and lower utilisation rates (65%-70%).

Source: AmeSecurities