Period  4Q13/FY13

Actual vs. Expectations  FY13 net profit of RM195.9m (-3.6% y-o-y) came in below expectations at 87% and 94% of our and consensus full-year net profit forecasts. The variance from our results was due to our higher-than-expected average selling price (ASP) for latex based gloves.

Dividends  A single tier interim dividend of 9 sen/share has been declared in the quarter bringing the total YTD FY13 NDPS to 16 sen.

Key Result Highlights  YoY, the 4Q13 revenue fell 10% to RM548.2m due to higher volume sales (+13%) but was dragged down by lower ASPs. The solid volume sales were driven by higher capacity utilisation as a result of ramp-up in demand for nitrile gloves which accounted for 25% of overall sales. Pretax profit fell 4% to RM63.8m due to the recognition of RM8.4m unrealised losses from its US Dollar (USD) foreign exchange forward contracts and Australian Dollar (AUD) fixed income investments despite margins improving from 11.0% in 4Q12 to 11.6% in 4Q13.

 YoY, FY13 revenue came in flat at RM2.3b, driven by higher volume sales (+18%) but was offset by lower ASPs. We believe Top Glove is facing difficulty in raising its ASPs in the challenging latex-based gloves market. FY13 net profit was dragged down by the recognition of RM19.3m unrealised losses from its US Dollar (USD) foreign exchange forward contracts and Australian Dollar (AUD) fixed income investments.

Buying remaining stakes in Medi-Flex  Separately, in an announcement to Bursa Malaysia, Top Glove is offering to buy the remaining 20.23% stake they do not own in Singapore Exchange Securities Trading Limited (SGX-ST)-listed Medi-Flex Limited (Medi-Flex) for SGD0.15 (RM0.38)/share, 15% higher than the closing price of SGD0.13 (RM0.33)/share.  Pursuant to the offer, Top Glove is seeking to voluntary delist Medi-Flex from SGX-ST. The proposed voluntary delisting exercise is expected to be completed by 3Q14.

 The proposed voluntary delisting must be approved by a majority of at least 75% of the total number of issued shares held by the shareholders of Medi-Flex who are present and voting, on a poll, either in person or by proxy at the EGM to be convened. Note that the offeror is not required to abstain from voting on the resolution for the proposed voluntary delisting.

 For illustration purposes, based on the offer price of RM0.38/share, the acquisition works out to 14.3x Medi-Flex FY13 EPS of 2.7 sen (market consensus is unavailable as the stock is not tracked by analysts). We believe the valuation is fair considering that earnings momentum for Medi-Flex has been picking up over the last few quarters. Due to the increase in sales from higher-margin products, mainly nitrile gloves, as well as cleanroom gloves coupled with new capacity expansion, Medi- Flex earnings is expected to gain further momentum going forward. Additionally, this acquisition would plug earnings leakages from minorities. Impact to FY14 net profit is <3%.

 Top Glove has to fork out RM71.8m for this acquisition. Financing for this acquisition is not an issue considering that Top Glove has a net cash of RM64.7m as at 30 Aug 2013 and a forecast FY14 operating cashflow of >RM250m.

Outlook  Looking ahead, Top Glove is expected to find difficulty to maintain ASPs in order to defend its market share due to its product mix which is skewed towards the challenging latex-based gloves market. 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 for nitrile gloves production.

Change to Forecasts  We are downgrading our FY14 and FY15 net profit estimates by 2% each. We have imputed for Medi-Flex earnings contributions which was more than negated when accounting for the lower ASP for latex based gloves. Correspondingly our target price is lowered by 2% to RM6.30 based on 16x CY14 EPS. MARKET PERFORM rating is maintained.

Risks to Our Call  Higher than expected volume sales.

Source: Kenanga