Period  3Q14/9M14

Actual vs. Expectations The 9M14 PATAMI of RM134m (-9.4% y-o-y) came in below expectations at 66-67% of both our and the consensus full-year forecasts. The negative variance from our forecasts was due to higher-than-expected losses at the China plant and lower-than-expected volume sales.

Dividends  A first interim single tier DPS of 7.0 sen was declared, which will go ex-div on 1 July 2014.

Key Result Highlights

 QoQ, the 3Q14 revenue was higher by 4.7% at RM574m largely due to higher volume sales (+6.2%). Sequentially, 3Q14 PATAMI rose 2% to RM42.4m due to: (i) narrowing losses from its China operations amounting to RM0.6m compared to RM5.4m in 2Q14 (following the closure of one of its China plants in 1Q and the disposal of this factory was completed in early

Jun 2014); (ii) slight margin improvement due to lower natural latex price and operation efficiencies gain from automation and various cost-optimisation initiatives. EBITDA margin rose 1ppts to 14% from 13% in 2Q14 and (iii) forex gain.

 YoY, 9M14 revenue fell by 3.9% as the higher volume sales (+2%) was dragged down by the lower ASPs. Zooming in on product specifics, nitrile registered the highest sales volume growth at 42% but was offset by lower volume sales from latex powdered (-7%), surgical (-16%) and latex powdered-free (-10%). However, 9M14 PATAMI fell 9.4% to RM134m due largely to losses from its China operations (vinyl division) amounting to RM11.2m and exacerbated by a higher effective tax rate of 18% compared to 13% in 9MFY13. Interestingly 9MFY14 EBITDA margin rose 1ppts to 14% due to lower input latex prices and cost efficiencies despite hikes in electricity and natural gas tariffs.

Outlook  Separately, in an announcement to Bursa Malaysia, Top Glove has completed disposal of its subsidiary in

China for RM22m (RM2m gain from disposal and expected to be recognised in 4Q14). The news is positive and in line with market expectations which we had highlighted in our reports previously. Recall, Top Glove had shut down its plant in ZhangJiaGang City since January this year and is consolidating its Chinese operations into F15 in Xinghua City after new regulations prohibited the usage of coal as an energy source in the former.

 Looking ahead, Top Glove is expected to face difficulty maintaining decent ASPs to defend its market share due to its product mix, which is skewed towards the challenging latex-based gloves market. Its growth prospects going forward is expected to come from its capacity expansion by additional 2.2b pieces of gloves, or 5% growth to a total of 44.2b in end-Dec 2014, largely for nitrile gloves.

Change to Forecasts We downgrade our FY14E and FY15E net profit forecasts by 9-11% taking into account of lower volume sales.

Rating & Valuation Correspondingly, our TP is reduced by 11% from RM5.58 to RM4.92 based on 16x revised CY15 EPS. Maintain our MARKET PERFORM call.

Risks to Our Call  Lower-than-expected volume sales.

Source: Kenanga