Top Glove's 9MFY12 results came in ahead of expectations. The better-than-expected results were mainly attributed to lower latex cost and stronger sales volume. Going forward, we believe the company will continue to benefit from the downtrend in natural rubber latex price, with the ongoing European debt crisis expected to dampen the prices of all commodities. Maintain Buy.

Above estimates. Top Glove's 9MFY12 results were above consensus and our expectations, making up 85% and 82% of the respective FY12 forecasts. The numbers took into account the unrealized forex gain of RM15.8m in 2QFY12 and unrealized forex loss of RM2.5m in 3QFY12. Excluding these, its core PBT would have been 24.9% higher q-o-q at RM66.2m, mainly owing to lower latex cost and a stronger top-line. In fact,  3QFY12 revenue rose 9.9% q-o-q at RM603.3m, bolstered by higher sales volume and a better product mix. Finally, on a YTD comparison, its 9M revenue and net profit jumped 12.9% and 59.3% respectively, mainly attributed to a higher sales volume, driven by a bigger production capacity and improvement in its product mix.

Main beneficiary of lower natural rubber latex prices. Although Top Glove is ramping up nitrile glove production to prepare itself for a potential switch in demand from natural rubber gloves to nitrile gloves, its existing natural rubber glove output still makes up 75%-80% of total production. Hence, it would directly benefit from any drop in the price of natural rubber latex due to the inherent time lag in passing on the cost savings to its customers. Also, with latex accounting for about 65% of its total cost, any further price decline in latex would certainly boost its bottom-line. We expect latex price to continue on a downtrend in the face of uncertainties in the global economy amid a prolonged debt crisis in the eurozone, which is anticipated to sap demand for all commodities. We do not have a floor price for latex but note that the commodity had slipped to a low of about RM4.00/kg during the pre-H1N1 period. Nevertheless, we do not think it will revisit this low since China, whose automotive industry is one of the biggest consumers of rubber, is not slowing down as quickly as anticipated given that its government is prepared to take steps to stimulate the economy, as indicated by its recent interest rate cut.

Maintain Buy. Our fair value for Top Glove remains unchanged at RM6.00, based on the existing PER of 20x on FY13 earnings. We are keeping our FY12 earnings unchanged for now as there may be further unrealized forex losses due to the strengthening of the USD against major currencies owing to fresh concerns over the European debt crisis. We continue to like Top Glove's global market leadership in medical examination gloves.

Source: OSK