- We reiterate our BUY recommendation on Top Glove Corp but place our fair value of RM7.08/share under review pending a meeting with management.

- Top Glove posted a 1HFY14 core net profit of RM106mil (+31% YoY) on the back of RM1.1bil (-3% YoY) in turnover. This is within expectations, accounting for 48% of our projection and 47% of consensus.

- Our core earnings exclude the group’s forex losses, which continued to widen in 2QFY14 (RM7.0mil vs. 1QFY14’s RM6.7mil). This follows its earlier move to hedge forward its USD receipts at a lower rate when USD appreciated by 1.6% against the RM. As a comparison, the group had registered forex gains of RM27mil in 1HFY13.

- QoQ, Top Glove’s 2QFY14 turnover and core net profit declined by 4.5% and 14.6%, respectively. As we had earlier noted, ongoing price competition (across all segments) had restricted the glove manufacturers’ ability to pass on any rise in input prices (e.g. electricity tariff). This, together with declining raw material prices and lower sales volume (-7% QoQ) had resulted in Top Glove’s QoQ softer top line.

- Meanwhile, deepening losses (2QFY14’s RM5.4mil vs. 1QFY14’s RM5.2mil) at its China operations continued to be a drag on earnings. The poor performance is mainly due to the current consolidation of F8 into F15, namely the clearing of stock as well as compensation for the retrenched workers.

- While management highlighted the presence of margin pressure from increased competition, we gather that the group had still benefited from its migration up the value chain (nitrile volume growth: +38% YoY), as evidenced by its 2.8ppts YoY core EBITDA margin expansion to 15.2% for 2HFY14.

- We understand that the group has targeted to add 0.6bil nitrile pieces by May 2014 (Phase 2 of F27) and another 1.6bil nitrile pcs by Dec 2014 (F29) to achieve a total installed capacity of 43.5bil pcs.

- The lower YoY growth in capacity (in relation to previous years’ average of 10%) not only tracks management’s cautious view of overcapacity in the nitrile segment, but also underlines its focus of expanding margins (vs. volume, previously) to meet its guided earnings growth of 10% for this fiscal year.

- The group did not declare any dividends this quarter. Traditionally, it announces dividends in 2HFY14. The group remains on track to meet its 50% payout guidance. Our FY14FFY16F gross DPS forecasts translate into yields of ~3.8%.

- At current price, Top Glove is valued at an attractive FY14F PE of 15x, which is below its 5-year mean PE of 16x. Calendarised, its forward PE of 14x is below the sector’s average PE of 15x.

Source: AmeSecurities