Period     3QFY13/9MFY13

Actual vs.  Expectations   The 9MFY13 net profit of RM148m (+7% y-o-y) came in at 64-66% of ours and the consensus full-year net profit forecasts. If we exclude the unrealised losses of RM10.9m from the fair value on its US Dollar (USD) foreign exchange forward contracts and Australian Dollar (AUD) fixed-income investments, the 9MFY13 net profit actually came in within expectations at 71% of both ours and the consensus full-year net profit forecasts. 

Dividends    A single tier interim dividend of 7 sen/share has been declared in the quarter. 

Key Result Highlights    YoY, the 3QFY13 revenue rose 0.1% to RM604m due to higher volume sales (+17%) but this was negated by a lower average selling price (ASP) (-15%). Nitrile registered the  highest sales volume growth at 50% with the rest were latex powdered (+8%), latex powdered-free (+17%) and surgical (+22%). In  terms of product mix, latex gloves accounted for 73% (3QFY12: 77%; 2QF13: 74%) and nitrile at 18% (3QFY12: 14%; 2QF13: 17%). The remaining balance was made up of vinyl and surgical. The EBITDA margin fell 3 ppts to 10% from 13% in 3QFY12 as it was hit by the minimum wage policy as well as the recognition of RM10.9m unrealised losses from its US Dollar (USD) foreign  exchange forward contracts and Australian Dollar (AUD) fixed-income investments despite the lower raw material prices.  Latex price fell sharply by 20.5% (from an average of RM7.52/kg in 3QFY12 to RM5.98/kg in 3QFY13). Similarly, nitrile price fell steeper by 40% (from an average of USD1.75/kg in 3QFY12 to USD1.25/kg in 3QFY13). The lower effective tax rate (ETR) in 3QFY13 compared to 2QFY12 was largely due to RM3.8m in unutilised tax allowances as well as the tax-free status of its overseas subsidiaries. This brought the final net profit to RM40.3m (-25% YoY; -20% QoQ).

QoQ, the 3QFY13 revenue rose 4.8% as the lower ASPs (-2%) were negated by the higher volume sales (+7%) in the quarter. 3QFY13 normalised EBITDA margins excluding the unrealised loss came in at 12.9% compared to 14% due to: 1) the lag effect in passing the cost through from the raw material increase QoQ, 2) additional costs incurred in the implementation of the automation process, 3) downtime from the conversion of old latex lines to nitrile and 4) the downward ASP pressure from latex-based gloves due to the weaker-than-expected demand. 

YoY, the 9MFY13 revenue rose 3.4% to RM1.8b, driven by higher volume sales (+20%) that more than offset lower the lower ASPs.  9MFY13 net profit to RM148m (+6.8% YoY), helped also by a lower effective tax rate arising from unutilised tax allowances as well as due to the tax-free status of its overseas subsidiaries.

Outlook    Judging from this quarter’s results and as per the details from the conference call, Top Glove is finding difficulty to raise its ASPs in the challenging latex-based gloves market. As such, it had to rely heavily on higher volume sales and efficiency improvement via its automated production lines to counter the effects of higher wages from the minimum wage policy going forward. We understand that 80% of its production lines are currently automated specifically on its stripping and packing processes. Upon full completion of the lines, Top Glove expects to reap cost savings of RM2m per month or RM24m p.a. on its labour costs from the move.

Its growth going forward is expected to come from its capacity expansion involving an additional 7.6b pieces of gloves, or by 16% to a total of 48b over FY13 and FY14, largely from nitrile gloves production.

Change to Forecasts    No changes to our forecasts. 

Valuation     Our MARKET PERFORM  rating is maintained. We are also maintaining our target price of RM6.36 based on 15x CY14E EPS. 

Risks    Lower than expected volume sales and the inability to pass through its higher wage cost to customers via higher ASPs.

Source: Kenanga