Top Glove?s topline growth offsets lower margin
Tags: Brokers Call | MIDF Research | Top Glove Corp Bhd

Written by Financial Daily
Friday, 18 June 2010 10:30

Top Glove Corporation Bhd
(June 17, RM12.84)
Maintain trading buy at RM12.86 with lower target price of RM14.20 (from RM14.68): Strong glove sales momentum sustained with volumes increasing 25% year-on-year (y-o-y) or 1% quarter-on-quarter (q-o-q) in 3QFY10, supported especially by the emerging markets.

In tandem with latex price trends, average glove selling price was 30% y-o-y or 11% q-o-q higher to US$26 (RM84.76) per thousand pieces. Due to both factors and adverse impact on US currency depreciation, Top Glove?s revenue grew 49.4% y-o-y or 9% q-o-q to RM555.9 million.

Top Glove?s earnings before interest and tax (Ebit) margin declined to 15% in 3QFY10 from average of 18.6% in the past three quarters.

We believed that higher volatility in latex price and forex market signified the lag effect in passing on the costs. Noted also, production utilisation rate was lower to 75% from 2QFY10?s 80%.

We reckon the additional production capacity growth might be faster than the glove sales order. Nonetheless, y-o-y, EBIT margin was still at par with that in 3QFY09 despite average latex price surged 71.7% y-o-y while US currency depreciated by 9.5% y-o-y, reflecting company?s cost passing power remained intact.

A total of five new factories are targeted to be completed by FY11. All in, Top Glove?s total glove production capacity will increase by 8.25 billion pieces or about 25% to 33 billion.

To be on the conservative side, we are keeping our earnings forecast unchanged, reflecting the risk of lower margin due to potential excess production capacity, and higher energy and labour costs going forward.



After all, the government has planned to scrap subsidies on energy products gradually. Beyond 2015, we expect glove makers to face a more volatile cost environment as natural gas will be priced at market rate.

In addition, a higher levy may also be charged on foreign workers. On the mitigating side, glove demand could be stronger particularly from the developing countries. In addition, glove makers? business model of passing on costs to the consumers is expected to be intact, and this will also cushion the downside.

First interim single-tier dividend of 14 sen per share was declared with ex-date and payable date on July 2 and July 23, 2010 respectively.

We continue to like Top Glove for its market leadership which commands about 22% of the global glove market share and its net cash position with good earnings quality.

Currently, Top Glove?s net cash is about 90 sen per share, the highest in the industry. Furthermore, there is no significant sign indicating glove demand slowing down.

We are rolling over our valuation into FY11 earnings, based on lower PER of 16 times (17 times previously) in order to factor in potential risks mentioned above. Consequently, we are revising marginally our target price downwards to RM14.20 (from RM14.68). ? MIDF Research, June 17


This article appeared in The Edge Financial Daily, June 18, 2010.