Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: OTHER

Top Glove Corp Bhd
(Oct 7, RM5.50)
Maintain neutral at RM5.69 with lower target price of RM6.38 (from RM6.90): Top Glove registered 4QFY08/10 revenue of RM541.4 million, 2.6% lower than the RM555.8 million reported in 3Q, but 26.7% higher year-on-year (y-o-y). Net profit came in 30% and 20.7% lower quarter-on-quarter (q-o-q) and y-o-y at RM45.1 million from RM64.5 million and RM56.8 million respectively.

Lower revenue and net profit were mainly caused by: (i) weaker US dollar vis-''-vis the ringgit, (ii) higher latex cost, and (iii) some impact from normalising demand. Although the rise in cost can be passed to customers via a hike in the average selling price of gloves, rubber glovemakers, including Top Glove, would need two or three months' time lag to do so. However, the weaker US dollar against the ringgit would in turn minimise the impact of a higher average selling price as sales are denominated in the greenback.

To put things into perspective, latex price has increased by 15.5% from January to August, and already averaged'' RM7.10 per kg, while the US dollar has weakened by 7.8% against the ringgit during the same period.

Despite the weaker 4Q performance, Top Glove continued to register double-digit full-year net profit and revenue growth which jumped by a sterling 49.8% and 35.7% y-o-y respectively, lifted by a combination of: (i) higher demand, especially from the healthcare sector and emerging markets; (ii) continuous cost-saving measures implemented at all factories; and (iii) higher productivity and improvement in production efficiency.

Ebit margin has been squeezed slightly from 15% to 14.6% due to higher costs. However, the net profit margin has been enhanced from 11% to 12.1%, largely due to lower net interest expense because of lower borrowings, while net cash position improved from RM165 million to RM300 million.

We are adjusting downwards our FY08/11-FY12 net profit estimate by 5% to 8% largely to factor in higher latex cost assumption (which we raised from RM7.10 per kg to RM7.50 per kg) and some housekeeping exercise. Consequently, our target price (TP) is now lower at RM6.38 from RM6.90 previously, which is derived by pegging an unchanged target PER of 14.2 times (based on a three-year average valuation) to revised CY11 EPS of 44.96 sen. Despite the lower TP, our 'neutral' rating on the counter is retained as its share price has weakened in recent months following the market downgrade on the sector.

Despite the concern over potentially higher latex price and weaker US dollar against the ringgit, we remain positive on the industry's demand side outlook, to be supported by: (i) the expected growth in global demand for rubber gloves by 8% to 10% in FY11/FY12 on the back of resilient demand from the healthcare segment; (ii) the expected liberalisation of the healthcare industry in major economies, especially China and India (to be followed by other countries in the Americas), which would drive higher private healthcare spending; and (iii) stronger manufacturing sales in an improving global economy.

Re-rating catalysts include: (i) the sudden emergence of a disease outbreak, especially flu, which would lift sentiment for healthcare-related counters; and (ii) a potential capital distribution exercise given its strong net cash position. ' BIMB Securities Research, Oct 7


This article appeared in The Edge Financial Daily, October 8, 2010.