- We maintain our HOLD recommendation on Top Glove but lower our fair value to RM4.80/share (from RM5.55/share) following its weak 3QFY14 results. We continue to peg our valuation to an FY15F PE of 16x, its 5-year mean.

- Top Glove posted a net profit of RM42.4mil for 3QFY14 (QoQ: +2%), bringing its 9MFY14 earnings to RM134.2mil (YoY: -9%). Annualised, this was below our recently reduced estimate, which was already 4% lower than consensus’.

- The group’s revenue growth (QoQ: +4.7%; YoY: -4%) continued to trail that of its sales volume (QoQ: +6%; YoY: +2%) as selling prices continued to be weighed down by declining raw material prices as well as the shift of bargaining power towards the buyers. YoY, ASPs have slipped by an average 8% while order lead time has contracted from 60 days to 40 days.

- Despite a greater proportion of nitrile gloves in its product mix (3QFY14: 24% vs. 3QFY13: 18%) and its various cost optimisation programmes, the group’s EBITDA margin remained relatively flat QoQ and YoY. This can be attributed to greater competition in the nitrile segment and rising costs (i.e. an additional RM2mil/month to account for the 15% and 19% respective hikes in electricity and natural gas tariffs).

- We note that Top Glove’s earnings were also negatively impacted by a higher effective tax rate of 22% in 3QFY14. Following this, management has guided for a rate of 18% (similar to 9MFY14’s) moving forward.

- On a more positive note, we gather that the consolidation of its China operations (F8 to F15) has been completed and the outfit is expected to contribute positively from 4Q onwards (losses have greatly narrowed in 3QFY14). A gain on disposal of F8 of RM2mil will also be recognised in the upcoming quarter.

- In view of its 9M underperformance, our expectations of a subdued 4Q, and higher tax rates; we have cut our FY14F-FY16F earnings estimates by 8%-16%.

- We also foresee further margin compression as we learnt that Top Glove had passed on a much lower proportion of the natural gas tariff increase (relative to the usual 80%-100%). This underlines our view that ease of cost pass-through for the players is fading. Thus far, it has only raised the ASP of its latex gloves by US$0.50/1000 pieces.

- In addition, the group has to ensure that its lower-margin latex and vinyl (68% and 8% of product mix) glove production lines are operating at decent utilisation rates to maintain efficiency.

- A first single-tier interim dividend of 7 sen/share was declared. Management had stated that its dividends would be the higher of its 50% payout target or 16 sen/share – the total for both FY12 and FY13. Given its share price retracements (YTD: -20%), yields are presently at a decent 3.5%.

Source: AmeSecurities