-  We maintain our BUY rating on Top Glove Corp but with a slightly lower fair value of RM7.08/share (from RM7.15/share previously) due to housekeeping post its FY13 results announcement.

-  For the 12 months ended 31 Aug 2013, Top Glove reported a net profit of RM196mil (-3% YoY). This was below our, but in line with consensus, forecasts. Its bottom line was negatively impacted by the volatile USD:MYR exchange rate, losses at its associates, and higher taxes.

-  Revenue was flattish YoY at RM2.3bil for FY13 as lower ASP (from lower raw material prices and tough pricing environment for latex and vinyl gloves) were balanced out by robust demand for rubber gloves (sales volume: +18% YoY). In FY13, latex and nitrile prices have declined by 22% and 28%, respectively.

-  Despite a 9% QoQ drop in turnover, earnings rose by 19%. This may be attributed to forex gains from operations, gain on disposal of short-term investments and a more favourable product mix. In 4QFY13, nitrile gloves represent 25% of the group’s total sales, up from 3QFY13’s 18% and FY12’s 14%.

-  The group’s move up the value chain and automation of its processes has enabled its EBITDA margin to expand by ~1ppt to its historical average of 14% in FY13. We expect margins ahead to be bolstered by :- (1) low and stable input prices; (2) its target 50:50 split of latex and nitrile gloves in 3-5 years; and (3) increased operational efficiencies from greater automation at its plants and the adoption of SAP ERP. These, however, may be marginally offset by higher energy costs in FY14F.

-  Moving forward, Top Glove’s earnings growth would be underpinned by additional production capacity from F25 (Sept 2013: 2bil pcs), F27 (Jan 2014: 0.6bil pcs) and F29 (June 2014: 1.6bil pcs), which will collectively raise its production capacity to 46.1bil pcs (520 lines).

-  Separately, Top Glove announced its intention to delist its Singapore subsidiary, Medi-Flex Ltd, by making an internally funded cash offer of ~RM70mil (SGD0.15/share or RM0.38/share) for the remaining 20.23% it does not currently own. The group’s balance sheet remains strong with FY13 net cash at RM158mil.

-  The offer price (premium of 15% to the last transacted price) represents a PE of 14x Medi-Flex’s FY13 (Aug YE). While the takeover would be earnings accretive to Top Glove and the subsequent delisting would result in savings on listing expenses, we are neutral on this development given the small stake.

-  The group had also proposed a final single tier dividend of 9 sen, bringing total FY13 gross dividends to 16 sen - a similar quantum to FY12’s. This represents a payout of 51% and a yield of 2.6%. Our FY14F-FY16F gross DPS forecasts translate into decent average yields of 3.2%.

Source: AmeSecurities