Top Glove's FY12 results came in ahead of expectations. The strong performance was  mainly  attributed  to  higher  sales  volume,  competitive  product  pricing, increased  production  efficiency  as  well  as  easing  raw  material  prices.  Thoughrubber/latex  prices  have  rebounded,  they  are  still  within  our  estimates  and  we believe the company can maintain its healthy margin and deliver good results. We continue  to  like  Top  Glove,  maintaining  our  BUY  call  at  a  higher  FV  of  RM6.25 after revising its FY13 earnings forecast upwards.   
 
Beating expectations. Top Glove's upbeat performance in FY12 beat OSK and street's estimates  by  20.1%  and  6.1%  respectively.  Although  its  topline  was  flat  q-o-q,  its operating margin has improved, resulting in a stronger bottomline q-o-q. Such significant improvement  in  net  profit  for  FY12  (+78.7%)  was  due  to  higher  sales  volume, competitive  pricing,  increased  efficiency  as  well  as  easing  raw  material  prices  (latex price) and strengthening of the USD against RM. Top Glove has proposed a final single tier dividend of 9 sen per share, culminating in a total dividend payout of 16 sen for FYE 31 Aug 2012, which is equivalent to a payout ratio of 50% (FY11 payout ratio: 40%).
 
FY13 remains positive. Moving forward, we believe that Top Glove may still be able to deliver promising results in FY13. The company is currently ramping up its nitrile gloves production to achieve a balanced product mix while reducing labour costs by investing in automated production lines to mitigate the impact of the minimal wage policy, which will be enforced next year. Moreover, rubber gloves enjoy a sustainable demand growth rate of 8%-10%, buoyed by demand from the healthcare industry.

Low M&A possibility. The rubber glove industry has come into the limelight these three months  due  to  two  corporate  exercises,  namely  the  privatization  of  Adventa  and  the proposed acquisition of Latexx Partners by Semperit AG Holding. The industry is indeed consolidating but we are of the view that Top Glove is unlikely to be an M&A target due to  its  rich  valuation.  However,  it  might  acquire  some  smaller  private  companies  if  the management sees any synergies that will potentially improve its efficiency.
 
Rubber/latex  price  still  healthy.  As  conveyed  earlier  in  our  sector  news  flash  report, rubber  glove  makers  are  comfortable  with  latex  prices  hovering  at  around  RM6.00  to RM7.00  per  kg.  Therefore,  although  rubber/latex  prices  have  rebounded  recently,  the CY12 YTD average price of around RM6.86/kg is still well within the healthy region and also within our forecast, thus posing no real threat to Top Glove or our valuation.

Maintain BUY with new FV of RM6.25. We have decided to raise our FY13 earnings forecasts for Top Glove to RM206.5m (previously RM182.7m) as we remain upbeat on the company's solid performance. The stock is currently trading at the mean of its five-year historical PE trading band and we have decided to value it based on +0.5 STD from mean, which translates to a new FV of RM6.25, pegged to 18.7x FY13f PE. We continue to like  Top  Glove's  global  market  leadership  in  medical  examination  gloves  thus  we  keep  our  BUY recommendation.

Source: OSK