- We upgrade Top Glove from HOLD to BUY with a higher fair value of RM7.10/share (from RM5.40/share previously) to reflect our upward revised net profit forecasts and higher target PE of 19x on FY16F EPS. This follows its better-than-expected 3QFY15 results.

- Our more upbeat view of the stock stems from the sustained growth in demand for its gloves as well as continued margin expansion from:- (1) the strong USD:RM exchange rate; (2) its ongoing move up the value chain; and (3) production, quality and efficiency measures (e.g. automation).

- All in, we have raised our FY15F-FY17F EBITDA margin assumptions by 2-3ppts, which translate to 20%-22% improvements in our earnings estimates.

- Top Glove posted a strong 3QFY15 net profit of RM72mil (QoQ: +29%; YoY: +71%) to lift its 9MFY15 earnings to RM177mil (YoY: +32%). The results, which were the best it had ever recorded, were well ahead of our previous estimates and street expectations. The group had also declared a first single tier interim dividend of 8 sen/share.

- Top Glove’s revenue had increased by 16% QoQ and 6% YoY on the back of sales volume growths of 10% QoQ and 6% YoY. We understand that demand for rubber gloves had remained resilient with the group’s order lead times standing at 40-50 days for natural rubber (NR) and 50-60 days for nitrile (NBR) gloves.

- The group had been able to take advantage of the solid glove demand in 3QFY15 following lower machinery downtime and increased demand from MNCs (especially in the North American markets) in view of their quality improvement initiatives and enlarged NBR glove capacity (presently, 44.6bil pcs). Its overall utilisation rate currently stands at ~85%.

- The robust demand had enabled the group to maintain its ASP (especially in the less competitive NR segment and of which Top Glove is the leader) despite the recent sharp appreciation of the USD vs. the RM (QoQ: +3%; YoY: +6%) and soft raw material prices. Usually, it would have had to share the cost savings with its customers.

- While NBR prices have been on a decline (QoQ: -6%), we expect prices to tick up in the coming weeks in tandem with NR prices, which have been on an uptrend (QoQ: +7%) following concerns over El Nino. Nonetheless, management maintained that it would be comfortable as long as prices remained below RM6.00/kg. The recent 10% hike in natural gas prices is also not expected to significantly impact its earnings ahead.

- At the current price, the stock is trading at an FY16F PE of 16x. With the impending US rate hike, we expect valuations of exporters like the rubber glove manufacturers to remain inflated. Our higher FY16F PE target of 19x, which is at a 30% discount to Hartalega’s 27x, reflects this.

Source: AmeSecurities Research - 18 Jun 2015