- We maintain our HOLD rating on Top Glove Corp with an unchanged fair value of RM5.15/share. We continue to peg our fair value to a PE of 17x, which is 1SD above its 5-year trend average.

- In its post-results briefing yesterday, management said that it expects to register a positive growth in its FY15F earnings on the back of healthy global glove demand (6% p.a.), cost tailwinds, and a strengthening USD against the RM.

- In 1QFY15, Top Glove’s sales volume had risen by only 1% QoQ and 4% YoY. This is not surprising given the absence of new capacity during the quarter. The group is scheduled to increase its installed capacity for FY15F by 18% to 50.4bil pcs but we have only factored in a 10% increase given the likelihood of delays.

- Although the decline in raw material prices had helped cushion margin pressures arising from cost inflations (e.g. +19% in natural gas tariff), it had also dragged its ASP lower. QoQ, ASP and latex price declines for the nitrile (NBR) segment were 5% and 4.6% while declines for the natural rubber (NR) segment were 10% and 12%, respectively.

- The larger fall in NBR ASP vis-à-vis its raw material price can be attributed to greater price competition. Additionally, the price of NBR had also held up relatively well (despite the current slide in crude oil prices and it being a substitute for NR) as demand of NBR continues to outstrip its supply. These also resulted in the narrowing of the margin gap between the two product segments.

- As we highlighted earlier, a stronger USD bodes well for the rubber glove manufacturers. Management concurred and noted that the stronger USD in 1QFY15 (QoQ: +2.8%) had contributed to its higher margins. Top Glove’s 1QFY15 EBITDA margin had expanded by 3ppts QoQ and 1ppt YoY.

- Besides the above factors, the improvements were also due to greater automation of its production facilities and to a lesser extent, a larger contribution of surgical gloves (2%) in its product mix in 1QFY15.

- With the retracement of crude oil prices, management is also hopeful for a status quo in natural gas and electricity tariffs in the coming year. Together, they form ~10% of Top Glove’s total production costs.

- Meanwhile, progress of its upstream venture has been slow, with less than 1ha of its 30,000ha land in Indonesia planted. The group is presently looking for local partners to form a JV in a bid to pare down its 95% stake in PT Agro Pratama Sejahtera. It will also be cutting the capex allocated for the planting (~RM30mil p.a. for 14 years).

- The stock is currently trading at a forward PE of 15x, which is on the lower end of its 5-year PE band of 11x-29x.

Source: AmeSecurities