Results

Although top line was below expectations, 9MFY14 core net profit of RM146.7m (+12.5% yoy) came in within expectations, accounting for 75.1% and 73.6% of HLIB and consensus full year estimates, respectively.

One-off adjustment related to forex arising from forward contracts in 3QFY13, 2QFY14 and 3QFY14 were RM9.3m, RM7.0m and -RM1.3m respectively.

Deviations

In line.

Dividends

Declared a first single tier interim dividend of 7 sen per share (3QFY13: 7 sen) with ex-date on 1st July 2014.

Maintaining target payout ratio of 50%.

Highlights

3QFY14 revenue of RM574.0m contracted by 5.0% yoy due to decline in ASPs (caused by lower raw material prices as latex prices fell 22.2% yoy while nitrile prices fell 7.6% yoy).

However, qoq revenue growth was favourable at +4.7% contributed by a rise in sales volume. This was mainly backed by rising demand in the nitrile segment (+11% qoq).

We expect nitrile segment to continue expanding as the incoming capacity of 2.2bn pcs p.a. are all catering for this segment.

Capacity expansion was marginal with an additional 0.7bn pcs, bringing total capacity to 42.0bn pcs p.a. Utilisation rate stood at 75%.

In a separate announcement, Top Glove stated that they have completed the sale of Zhangjiagang (F8) via disposal of their entire equity interest in the subsidiary for a total consideration of RM22m. This was part of their ongoing cost rationalisation and business streamlining strategy.

Gain from the disposal of about RM2m will be accounted for in the coming quarter.

As expected, losses from China’s operations are tapering off, incurring only a marginal loss of RM0.6m (2QFY14: RM5.4m). Anticipating a turnaround in the following quarter.

CAPEX guidance: RM180m – RM200m in FY15.

Risks

• Further reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Weaker USD against MYR.

Forecasts

Unchanged.

Rating

HOLD, TP: RM4.56

Positives - Gradual shift to nitrile gloves, expecting breakeven in China’s operations, cost reduction through product line automation and SAP ERP system

Negatives - Will experience lower net profit margins when compared to peers due to low exposure in nitrile latex gloves and PF NR gloves. About 47% of output in low margin powdered NR glove.

Valuation

Maintain HOLD even though we have reduced our fair value by 14.1% from RM5.31 to RM4.56.

Our valuation was pegged to a lower multiple of 13.5x CY15 EPS based on 1SD below 3-year historical average P/E (see Figure 6) compared to previous’ 15.7x.

Source: Hong Leong Investment Bank Research - 18 Jun 2014