- We maintain our HOLD recommendation on Top Glove Corp with an unchanged fair value of RM5.15/share. This is based on an unchanged FY15F PE target of 17x.

- Top Glove reported a 1QFY15 net profit of RM49mil on the back of turnover of RM568mil. Annualised, the results met both our and street expectations.

- The group’s revenue was lower by 2% QoQ and 1% YoY as increases in sales volume (QoQ: +1%; YoY: +4%) continued to be offset by lower ASP (in tandem with declining raw material prices).

- Given the marginal QoQ increase in sales volume, we suppose that demand arising from the Ebola outbreak remained insignificant. Top Glove, which has the largest presence in the African continent, saw its sales contribution from the region rising only 1ppt QoQ to 5%.

- The group’s net profit was lower by 3% YoY as competitive pressures limited its ability to pass on cost increases but QoQ, earnings were higher by 6%. This can be attributed to a stronger USD as well as a 3ppts EBITDA margin expansion.

- Top Glove’s China operations, which were recently consolidated, remained in the black after having turned around in 4QFY14. In light of its positive outlook, the group has no plans to exit the Chinese market.

- As expected, no dividend was declared for this quarter. We are keeping our gross DPS estimates of 16 sen for FY15F and FY16F, which translate to yields of 3.6%.

- Unlike its peers, Top Glove’s capex cycle is decelerating. Management has guided for lower capex of RM150mil p.a. (vs. RM200mil previously) to account for its capacity expansion activities (new plants and landbanking), construction of its corporate headquarters (Top Glove Tower) and upstream plantation venture.

- It is holding back its capacity expansion plans (FY15FFY17F 3-year CAGR of 5.3% vs. 10% historically) to focus on improving its operational efficiencies to raise its margins.

- Despite its weak fundamentals, we suppose that the stock will benefit from renewed investor interest towards the sector and have thus tactically pegged its FY15F earnings to a higher target PE of 17x, which is +1SD above its 5-year trend average of 16x.

- This follows our view of a potential sector re-rating given expectations of a further depreciation of the RM against the USD in the coming year (YTD: -6%). The rubber glove players would be prime beneficiaries given their favourable exposure to the USD (>90% of receipts in USD) and relatively resilient earnings.

Source: AmeSecurities