News  Over the weekend, according to The StarBiz, Top Glove may pare down stake in its Sumatran rubber plantation and seek out local partners as Indonesia mulls tough new laws to curb foreign ownership of plantations. Additionally, according to The StarBiz, quoting founder and chairman Tan Sri Lim Wee Chai, Top Glove is scouting for joint venture partners for who can work with the local government and manage employees.

Comments  The potential divestment/paring down of its stake in the Indonesian rubber plantation venture is positive to Top Glove, which could trigger a rerating on the stock as this venture was not well received by the investment fraternity in the first place. This is simply because the seven-year gestation period for rubber plantation resulted in such a drain to Top Glove’s resources, which could be better invested elsewhere. This move could potentially see Top Glove saving an estimated RM10m to RM30m in its cashflow.

 Recall, Top Glove has bought a 95% stake in PT Agro Pratama Sejahtera for RM22m, which has a 60-year concession to plant rubber trees on 30,773ha of land in Sumatra. Top Glove has set aside RM450m over the next 14 years to establish a green field plantation in Indonesia. For the first six to seven years, Top Glove is expected to spend a total of RM240m or RM20m-RM30m p.a. to clear the land and fully cultivate its rubber estates in Indonesia. This means that the RM240m investment will likely yield zero or minimal returns in the short-term since the gestation period for rubber trees is six-seven years.

Outlook  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 prospect going forward is expected to be driven by capacity expansion through additional 2.2b pieces of gloves, or 5% growth to a total of 44.2b in end-Dec 2014, largely for nitrile gloves.

Forecast  No change to our earnings forecasts.

Rating & Valuation Maintain our MARKET PERFORM and TP of RM4.92 based on 16x CY15 EPS.

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

Source: Kenanga