Results

Although top line came in slightly below expectations, FY13 core net profit of RM206.8m was within expectations, accounting for 98.6% and 99.7% of HLIB and consensus full year estimates respectively.

Deviations

In line.

Dividends

Proposed a final single tier dividend of 9 sen (4QFY12: 9 sen) per share subject to shareholders’ approval at the forthcoming AGM. If approved, YTD dividend will amount to 16 sen per share (FY12: 16 sen).

Highlights

In separate filing, Top Glove also proposed to seek the voluntary delisting of 79.8%-owned Medi-Flex from SGXST with a cash offer price of SGD0.15 (15.4% premium over last price of SGD0.13) per share, translated into Medi- Flex’s FY12’s PB of 3.95x and PE of 33.6x.

This corporate action will be funded via external borrowings and relevant financing has been obtained. Top Glove justified this proposal on the back of earnings accretion, savings of listing expenses and low trading liquidity. This exercise is expected to complete in 3QFY14 which in turn expected to contribute positively to the Group’s FY14 earnings.

Owing to enhanced capacity utilization stemming from an increase in demand, nitrile glove sales now accounted for 25% of overall group revenue.

Raw material prices continue to trend down, on softer general commodity prices in the face of a challenging macro-economic environment. For FY13, latex prices declined by 22% to RM5.77/kg while nitrile prices fell by 28% to RM3.82/kg. Going forward, it expects the prices to hover at current level with possibly further downward inclination which enabled a more favourable operating environment.

Expansion plan: additional 6 lines with capacity of 0.6bn pcs by Jan 2014 and 16 lines with capacity of 1.6bn pcs by June 2014.

Comments

Slightly positive on Medi-Flex privatization proposal as it is:

1. Profitable after Top Glove’s restructuring process.

2. Relatively cheap (FY13’s PE of 14.4x) compared to Top Glove’s current PE of 19.5x.

3. Earnings accretive although marginally.

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

Maintained pending analyst briefing on Oct 17th, 2013.

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

Reiterate our HOLD rating on the stock on the back of unchanged PT of RM6.09 unchanged 16.0x CY14 EPS.

Source:Hong Leong Investment Bank Research - 14 Oct 2013