Results

• 1Q15 revenue of RM567.6m (- 1.1% yoy, -2.0% qoq) was translated into core net profit of RM50.3m ( -11.7% yoy, +10.1% qoq).

• Although top line fell shy of expectations, bottom line turned out in line, accounting for 24% and 25.8% of HLIB and consensus full year estimates, respectively.

• One-off adjustment related to forex arising from forward contracts in 1Q14, 4Q14 and 1Q15 were RM6.7m, -RM0.7m and -RM1.6m, respectively.

Deviations

• Broadly in line.

Dividends

• None (1Q14: None).

• 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

• 1Q15 revenue contracted by 2.0% qoq as the 1% growth in sales volume was easily offs et by declining ASPs, arising from lower raw material prices.

• Nevertheless, bottom line growth turned positive underpinned by lower raw material prices and stronger USD, coupled with concerted effort in quality enhancement. This was, however, partially offset by higher electricity and natural gas tariff as well as hampered cost pass -through from the intense competition in nitrile glove segment.

• Raw material prices continue to trend down with latex prices declining to RM3.90/kg (- 12.1% qoq) and nitrile prices to USD1.04/kg (-4.6% qoq).

• Notwithstanding the increasingly intense competition, Top Glove will continue to expand its nitrile capacity to produce a more balanced product mix, in line with market trend.

• As such, F29 in Klang, fitted with more efficient and technologically-advanced nitrile lines, will be operational by January 2015. This will increase the number of production lines from 470 lines to 484 lines and expand the total installed capacity from 42bn to 44.6bn pcs p.a.

• With the turnaround in China’s operations, the geographical breakdown of profit now gives a clearer picture, showing Malaysia, Thailand, China and others contributing 70%, 12%, 2% and 15%, respectively.

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, China’s operationsturned around, cost reduction through product line automation and SAP ERP system.

Negatives

• Will experience lower net profit margins whencompared 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 is pegged to an unchan ged multiple of 13.5x CY15 EPS based on 1SD below 3-year historical average P/E

Source: Hong Leong Investment Bank Research - 17 Dec 2014