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

Top Glove Corp Bhd
(Oct 13, RM5.77)
Maintain neutral at RM5.65 with target price of RM5.14: Although the long-term outlook for the glove industry remains positive,'' supported by increasing demand, the management is cautious over near-term setbacks caused mainly by excess production'' capacity. In a glove supply surplus situation, we believe competitive pricing is one of'' the key factors to attract'' customers.'' Hence, this puts glovemakers in a less favourable position to pass on extra costs as compared with'' a supply shortage situation.'' ''

The management is confident of a 10% growth in global glove demand, and earnings growth for FY11 is targeted at a similar pace.'' It indicated that orders improved slightly compared with the previous month. We expect Top Glove's revenue to'' remain'' flat quarter-on-quarter for the next two quarters. We have noted that the inventory stock-up period has also normalised to two or three months from five or six months previously (post-H1N1 outbreak). World glove usage is expected to reach 150 billion pieces this year.

Despite accounting for 89% of the world population, Asia and Latin America's glove imports were only 32% of the world total. The management is positive on the demand'' prospects, especially from Asia and Latin America, given their glove consumed per'' user is still significantly lower than the developed countries like the EU and US. Note that in Asia and Latin America, latex gloves make up the bulk of their purchases as they are cheaper than nitrile gloves. Powdered and powder-free latex gloves accounted'' for 83% of the company's sales in FY10 (FY09: 80%), with the remaining from nitrile (7%), vinyl (6%), surgical (3%) and others (1%). ''

We maintain neutral and keep our target price unchanged at RM5.14 based on 13 times FY11 EPS, which is the average'' between 2001 and 2005 (the period prior to the share price rally for the industry). The supply surplus remains our main concern, taking into account our estimated additional glove production capacity growth for the industry of 15% to 20%.'' However, we expect Top Glove's share price to be well-supported at the current level, given its net cash position of 49 sen per share and potential earnings enhancement from mergers and acquisitions, specifically targeting nitrile glove manufacturers. ' MIDF Research, Oct 13


This article appeared in The Edge Financial Daily, October 14, 2010.