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

Top Glove Corporation Bhd
(Dec 16, RM5.12)
Maintain fully valued at RM5.45 with revised target price RM4.60 (from RM4.80): Southern Thailand, a major rubber growing area, has been hit by severe flooding since October. This has disrupted transportation, lowered rubber output, and delayed shipments. Unfavourable weather has also affected rubber harvesting in Indonesia, Malaysia and Vietnam. As a result, latex prices hit a record high of RM9.45 per kg, and averaged RM7.35 year-to-date. Top Glove has consistently raised average selling prices (ASPs) in the past three months to keep up with rising latex prices. ASPs (per box of 1,000 pcs) for powdered, powder-free and nitrile gloves now average US$31 (RM97), US$35 and US$33, respectively. But as the ASPs lag latex price hikes, Top Glove is being pressured by rising operating costs, given that 83% of its gloves are made from natural rubber latex.

Demand remains soft as destocking is still ongoing. We understand 1QFY11 sales volume fell 5% quarter-on-quarter and capacity utilisation has fallen to 70% from 75%. Given the excess capacity, Top Glove has again deferred the commissioning of Factory 7 and 21 by three to five months. Latex prices rose 11% in the quarter, and as expected there was a time lag in passing on the higher costs. The greenback has also weakened 2% against the ringgit. Given the persistent headwinds, we cut FY11F earnings per share by 9%.

Maintain 'fully valued' with the target price lowered to RM4.60. We have nudged down our TP to RM4.60 (previously RM4.80), pegged to 13 times CY11 EPS. But demand should start to normalise in the next three months when restocking resumes. ' HwangDBS Vickers Research, Dec 16


This article appeared in The Edge Financial Daily, December 17, 2010.