- We reiterate our HOLD recommendation on Top Glove Corp with an unchanged fair value of RM4.80/share.

- Top Glove reported earnings of RM46mil in 4QFY14 to end the year with a net profit of RM180mil. Its earnings would have missed expectations were it not for the low effective tax rate of 3% in 4Q.

- The group also proposed a final single-tier dividend of 9 sen/share to bring its total gross dividends for FY14 to 16 sen/share. This translates to a yield of 3.3% and a payout ratio of 55% - in line with its 50% dividend policy.

- Despite registering a higher sequential sales volume in 4Q (+3% QoQ), Top Glove’s revenue was flat at RM580mil.

- This can be attributed to the continuous decline in raw material prices, namely natural rubber (NR) (-4.6%) and nitrile (NBR) (-1.6%), as well as the weakening of the USD against the RM (-1.9%).

- Notwithstanding the negative impact on the group’s top line, the fall in latex prices (40%-50% of costs) helped to cushion the impact of higher natural gas prices (+19% beginning May 2014). Its EBITDA margin was down by 1.6ppts QoQ to 12%.

- We understand that Top Glove was only able to pass on the additional cost for its NR products but not its NBR products given the stiff competition in the latter’s segment.

- For the full year, Top Glove’s net profit declined by 8% following lower revenue of RM2.3bil (-1.6% YoY), a 0.7ppt contraction in EBITDA margin, consolidation costs for its China operations, and forex losses amounting to RM11.8mil.

- Looking ahead, we expect Top Glove’s earnings growth to be subdued (+4% p.a. for FY15F and FY16F) as demand for its products remains lacklustre and as margin pressure weighs.

- Its sales volume is likely to increase at a lower rate (vis-à-vis the global demand growth of 8%-10% p.a.), dragged by its unfavourable product mix (~68% in NR segment).

- Having recognised that its volume strategy is no longer effective, the group will be slowing down its capacity expansion plans (FY15F-FY17F 3-year CAGR of 5.3%) and work on improving its operational efficiencies (e.g. automation) to raise margins.

- As it is, its EBITDA margin has been hovering at ~14% despite the higher value NBR segment’s contribution increasing by 4ppts to 24%.

- Given the retracement of its share price (-15% YTD), the stock is now trading at a forward PE of 16x, which is within 1SD of its latest 5-year trend average of 17.2x.

Source: AmeSecurities