- We reiterate BUY on Top Glove Corporation but raise our fair value to RM9.30/share, post revisions to our earnings estimates. We have also pegged our fair value at a higher FY16F target PE of 21x (vs. 19x previously).

- Following our recent company visit, we raise Top Glove’s FY15F-FY17F EPS forecasts by 10%-15% to account for its better-than-expected sales volumes (3QFY15: +10% QoQ; 9MFY15: +6% YoY) and our expectations of further margin expansions (9MFY15: +3.4ppts YoY).

- We understand that demand for rubber gloves has remained resilient with Top Glove’s order lead times at 40-50 days for natural rubber (NR) and 50-60 days for nitrile (NBR) gloves. Management attributes this to the recent closure of one of Kimberly-Clark’s two plants in Thailand (which left a supply void of ~3.2bil pcs p.a.) as well as growing demand from the Asian markets.

- This solid demand, especially in the less competitive NR segment and of which Top Glove is the leader, has enabled the group to maintain its overall ASP despite the recent sharp appreciation of the USD vs. the RM (+9% YTD). It would usually have had to share the cost savings with its customers. Note that the group has the capacity to take advantage of this sustained demand.

- We do not foresee any surprises on the cost side. While NBR prices have remained fairly stable, NR prices have declined by 15% after climbing to a high of RM5.13/kg in early June following concerns over El Nino. The retracement will help cushion any impact from the recent 10% hike in natural gas prices.

- Supported by its strong balance sheet (net cash of RM221mil), Top Glove is also actively seeking M&A opportunities in Malaysia and Thailand to expand/diversify. In addition to the other glove players, targets include former and packaging suppliers as well as condom makers.

- With regards to its upstream venture in Indonesia, we understand that all works have halted pending its search for a local JV partner. Management is open to exiting this business by disposing its subsidiary, which owns the plantation rights. Its total costs to date, including land, amount to RM28mil.

- Since our upgrade to BUY last month, Top Glove’s share price has rallied by 32%. At the current price, it is trading at FY15FFY16F PEs of 19x-20x (+1SD above its 5-year mean). We believe the stock still has legs to run given the favourable operating environment.

- With the impending US rate hike, we expect valuations of exporters like the rubber glove manufacturers to remain inflated. Our higher target PE of 21x is based on a narrower 15% discount to industry leader Hartalega Holdings’ 27x.

Source: AmeSecurities Research - 30 Jul 2015