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

Top Glove Corp Bhd
(Dec 9, RM5.51)
Maintain hold at RM5.55 with fair value of RM5.40: Top Glove Corp Bhd is scheduled to release its 1QFY2011 results next week.

Based on our analysis, 1Q performance is likely to be weak on lower sales volume and margins. This would mark a continuing decline in earnings on a sequential basis, after earnings peaked in 2QFY2010 (December 2009 to February 2010).

While management has implemented several hikes in the average selling price (ASP), prices still lag the surge in latex prices. As an indication, ASP was raised by an average 5% during 1Q, but average bulk latex as measured by SMR20 rose 11% in the same quarter.

We also understand sales volume for the quarter saw a slight dip, attributed mainly to lower orders for powder-free latex examination gloves. The upward trend in latex prices has naturally resulted in higher input costs for latex-based gloves. ASP for powder-free gloves is now at a 13% premium to both nitrile and powdered latex gloves (Powdered: US$31, Nitrile: US$31 to US$32 per 1,000 pieces).

Earlier in 4QFY2010, the group guided for a 10% increase in FY2011F sales and net profit. However, we see a growing earnings risk on a lower than expected rebound in customer orders in the following quarters, especially if the latex price environment remains unfavourable.

Assuming a flattish 1Q earnings growth, we are looking at cutting our FY2011/12F EPS forecast by some 30% and 28%, to 32 sen per share and 34 sen per share, respectively. No change to our recommendation and fair value of RM5.40 based on a target PER of 13 times CY2011F earnings, pending the release of the 1QFY2011 results.

High latex cost, a weak US dollar and overcapacity will continue to pose a challenge to earnings. ' AmResearch Sdn Bhd, Dec 9


This article appeared in The Edge Financial Daily, December 10, 2010.