- We maintain our BUY recommendation on Top Glove Corp with an unchanged fair value of RM7.08/share.

- For the first quarter ended 30 November 2013, Top Glove recorded net profit of RM50mil on turnover of RM574mil. This accounted for 23% of our forecast of RM222mil and 22% of consensus’ RM229mil.

- Top Glove’s revenue was up 4.7% QoQ thanks to additional nitrile capacity from its recently completed F25 (+2bil pcs). YoY, however, turnover was lower by a marginal 1.8% as lower ASP continue to be a drag. Sales volume remains healthy, growing 3% QoQ and 10% YoY.

- Stripping out the RM15.2mil fair value forex gain in 1QFY13, the group’s core net profit was up a decent 17.7% YoY on an EBITDA margin expansion of 1.7ppts. This was brought about by favourable input prices and improved product mix.

- On a sequential basis, core earnings declined by 11.3% mainly due to the strong competition from the local vinyl glove manufacturers faced by its China subsidiaries. The group’s China outfit remained in the red with losses widening from RM1.1mil in 4QFY13 to RM5.2mil in 1QFY14.

- Interestingly, we note that despite growing contribution from the higher-margin nitrile glove segment and greater automation of its plants, Top Glove’s EBITDA margin had compressed by 3.1ppts QoQ to 14.4%. As such, we suspect that price competition in the latex glove segment (4QFY13: 69% of product mix) has further intensified.

- As expected, no dividend was declared this quarter. Our gross DPS forecasts of 18 sen and 19.5 sen for FY14F and FY15F are premised on a 50% payout ratio, translating into decent yields of 3.2%.

- With regards to the proposed privatization of Medi-Flex Ltd that was announced in October, management said that an EGM would be held on 30 December 2013 to seek shareholders’ approval.

- We gather that Top Glove remains committed to its strategy of continued capacity expansion to support its guided earnings growth of 10% in FY14F. Judging by the 8%-10% p.a. increase in global glove consumption and the group’s plan to raise its capacity by 2.2bil pcs (+5%, mainly nitrile) to 46.1bil pcs p.a. come June 2014, we believe it can achieve its target.

- That said, we remain cognizant of the upcoming challenges plaguing the industry, namely the 16.85% electricity tariff hike effective 1 January 2014 and probable hike in natural gas prices in addition to the ongoing price competition.

Source: AmeSecurities