Results

FY14  core  net  profit  of  RM191.9m  (+6.6%  yoy)  came  in within  expectations,  accounting  for  98.2%  and  102.8%  of HLIB and  consensus  full year  estimates, respectively.

One-off  adjustment  related  to  forex  arising  from  forward contracts  in  4QFY13,  3QFY14  and  4QFY14  were  RM1.3m, -RM1.3m  and  -RM0.7m respectively.

Deviations

• In line.

Dividends

Proposed  a  final  single  tier  dividend  of  9  sen  per  share (4QFY13:  9  sen)  subject  to  shareholders’  a pproval  at  the forthcoming  AGM.  YTD  dividend  amounted  to  16  sen  per share (FY13: 16 sen), in line with our projection of 15.7 sen.

BOD resolved to adopt dividend policy of not less than 50% of PATAMI in future financial years.   This came in neutral as payout ratio has  always been  circa 50%.

Highlights 

FY14 revenue  contracted  by 1.6% yoy  as the 3% growth in sales  volume  was  easily  offs et  by  declining  ASPs,  arising from lower  raw material prices.

The  decline  in  latex  prices  to  RM4.77/kg  ( -17.3%  yoy)  and nitrile  prices  to  RM3.51/kg  (- 8.3%  yoy)  compel  any  cost savings  to be passed on, thereby causing margin  pressure.

This  leads  to  a  lower  PATAMI  of  RM180.1m  ( -8.3%  yoy) which  is  worse n  by  the  competitive  nitrile  environment, increase  in  natural  gas  prices,  electricity  tariffs  hike  and forex losses owing to strengthening  of MYR.

Top  Glove  is  taking  baby  steps  in  penetrating the  nitrile glove  segment.  Contribution  of  nitrile  glove  to  total  sales volume  grew  to  24%  in  FY14  (FY13:  20%).  It  indicates favourable  growth  prospects  for  nitrile  gloves  in  developed markets, such as US, UK and Germany.

As  such,  capacity  expansion  in  nitrile  glove  production  is carried on with additional 6 lines at  F27, set to commission in  September  2014.  With  the  production  lines  at  F29  ready for  operation  by  January  2015,  the  total  installed  capacity will be lifted from 42bn to 44.6bn  pcs p.a.

As  what  we  anticipated,  China’s  operations  made  a turnaround  in  this  quarter,  reporting  a  profit  of  RM1.4m (3QFY14:  loss of RM0.6m).

Risks

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

Forecasts

• Maintained  pending  analyst briefing  on 16 th October 2014.

Rating

HOLD, TP: RM4.56

• Positives  -  Gradual  shift  to  nitrile  gloves,  potentially profitable  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  on the back of unchanged  TP of  RM4.56.
• Our valuation was pegged to an unchanged multiple of 13.5x CY15  EPS  based  on  1SD  below  3-year  historical  average P/E

Source: Hong Leong Investment Bank Research - 15 Oct 2014