Results

Although top line came in within our expectations, 9M13 core net profit (excluding forex loss) of RM159.0m was a disappointment, accounting for 65.8% and 69.0% of HLIB and consensus full year estimates respectively.

The results included a one-off adjustment of unrealized losses of RM10.9m from the fair value of USD FOREX forward contracts (due to exchange rate volatility) and AUD fixed income investments.

Deviations

Lower-than-expected gross margins as latex glove ASP was under pressure coupled with higher cost due to down time for production lines automation.

Dividends

Declared a first single tier interim dividend of 7 sen (3QFY12: 7 sen) per share. Committed to maintain 50% payout ratio.

Highlights

Flat yoy revenue growth as 17% improvement in sales volume was negated by lower ASP due to the declining raw material prices. Volume was higher mainly due to the sustainable demand increase satisfied by newly installed capacity (nitrile) and a more competitive pricing structure.

As nitrile production line reaches 20% (95 out of 470), its revenue contribution also increased in tandem by 4-ppt qoq to 18% on the back of 50% increase in volume. It will continue with new instalments and conversions to meet the target of balance capacity mix of NR and nitrile glove.

In spite of the wintering season, latex prices declined by 20.5% yoy from RM7.52/kg to RM5.98/kg while nitrile prices fell by 27.5% yoy from RM5.30/kg to RM3.84/kg. The company expects prices to hover at current level with possibly further downward inclination.

Top Glove foresees that future demand remains bullish, partly thanks to the recent outbreaks which created further awareness on healthcare hygiene and disease prevention.

Target to increase global market share from 25% to 30%.

Guidance: 4QFY13 will be relatively weak on the back of subdued latex glove ASP and higher OPEX which involve production line automation and SAP ERP project.

Risks

• Spike in latex prices.
• Weaker USD against the MYR.
• Delays in capacity expansion plans, causing a hold back in capturing oncoming glove demand.

Forecasts

• Adjusted forecasts based on deviations above and new guidance. Consequently, FY13-15 EPS cut by 11.1-13.2%.

Rating

HOLD TP: RM6.09

• Positives - Gradual shift to nitrile gloves and its upstream diversification (to meet ~40% latex requirements) delivering long term benefit, mitigate volatility of NR latex prices.
• Negatives - Will experience lower net profit margins when compared to peers due to low exposure in nitrile latex gloves and PF NR gloves. About 54% of output in low margin powdered NR glove.

Valuation

• Our earnings revision has resulted in lower TP by 11.9% from RM6.91 to RM6.09 based on unchanged 16.0x CY14 EPS. Subsequently, in view of the limited upside, we also downgrade our call on the stock from TRADING BUY to HOLD.

Source: Hong Leong Investment Bank Research - 14 Jun 2013