- We maintain our HOLD recommendation on Top Glove Corp with an unchanged fair value of RM4.80/share following our recent company visit. Our valuation is pegged to an unchanged FY15F PE of 16x – its 5-year mean.

- We expect Top Glove’s FY14F-FY16F earnings growth to be subdued as demand for its products remains lacklustre and as margin pressure weighs.

- Top Glove’s sales volume is likely to rise at a lower rate (vis-à-vis the global demand growth of 8%-10% p.a.) in the near term, dragged by its unfavourable product mix. Latex gloves presently make up 68% of the group’s total product mix while nitrile gloves – the growing segment – constitute 24%.

- With its previously proven volume strategy no longer effective following the industry’s structural shift and its late entrance into the nitrile segment, we opine that the group had been compelled to compete on price to gain market share. Management, however, believes that the low ASP is due to overcapacity in the segment.

- In light of its cautious outlook, the group is holding back its expansion plans. It is targeting to add only 2.6bil pcs by end- FY15F to its current installed capacity of 42bil pcs. The YoY growth in capacity of 1%-5% is lower than its previous years’ average of 10%.

- We note that Top Glove’s EBITDA margin has remained relatively flat at ~14% despite its ongoing expansion up the value chain into the nitrile segment (contribution +7ppts YoY to 24% for 9MFY14). Management attributes this to cost pressure (e.g. electricity and natural gas tariff hikes) and stiff competition which limit its ability to pass on the cost increases.

- In response to recent reports of a 30% cap on foreign ownership of Indonesian plantation land (which includes rubber estates), management said it is open to JVs to pare down its 95% stake in PT Agro Pratama Sejahtera.

- We are keeping our FY14F-FY16F earnings estimates for now pending the release of its full year results on 14 Oct. An analyst briefing is also scheduled for 16 Oct.

- While net profit for FY14F is likely to be below FY13’s (-10% YoY), we expect a minimal 5% growth for FY15F given that its China operations are expected to return to black in 1Q and forex impact (9MFY14: RM14mil loss) is anticipated to diminish with shortened forward contract periods.

- Since retracing to a low in June, Top Glove’s share price has advanced by 12% on the back of the Ebola outbreak despite the absence of a significant pick-up in glove demand. Valuation-wise, the stock is trading at FY14F-FY16F PEs of 15x-18x.

Source: Kenanga