The recent USD strength appear to have taken centre stage for local exporters, masking earlier concerns that their prospects would be hampered by Donald Trump’s plans to scrap the Trans-Pacific Partnership Agreement (TPPA) given his stance on trade protectionism. Although we believe that local exporters could lose out from this notion, we expect the glove makers to emerge relatively unscathed given their competitive advantage, dominant market share, and low-value characteristics.

In this report, we highlight TOPGLOV which we currently have an OUTPERFORM call and RM6.10 target price. Last month’s earnings briefing provided renewed optimism on the stock, and we expect subsequent quarterly earnings to improve on: (i) hikes in average selling prices (ASPs), (ii) abating price competition, and (iii) sustained demand for rubber gloves. Furthermore, we also look forward to TOPGLOV’s expansion plans which capacity increase by 26% to 58.8b pieces over the next three years.

From a charting perspective, TOPGLOV’s share price is now in the midst of retesting the crucial resistance at RM5.25/RM5.35. Investors should watch for a decisive breakout above this level, which could then signal a climb towards RM5.85/RM5.95 next. Investors who wish to gain a leveraged exposure may consider TOPGLOV-C6 (strike RM5.15). TOPGLOV-C6 currently offers an effective gearing of 6.66x, meaning that a modest 12.3% climb in the underlying price to RM5.95 would translate to approximately 82% gain in the Call Warrant to RM0.17.

Once TOPGLOV punches through the RM5.25/RM5.35 resistance, the share price could potentially climb towards RM5.85/5.95 fairly quickly (1-2 months). For this strategy, TOPGLOV-C6 (strike RM5.15) comes across as the obvious choice. TOPGLOV-C6 offers a high effective gearing of 6.66x, yet is reasonably priced at an implied volatility of 38.6% (compared to the rest which are 54.3% or higher). TOPGLOV-C6 has also been the most popular option, with daily average volume of 9.5m units.

For call warrants that are less risky, we like TOPGLOV-C9 (strike RM5.00), TOPGLOV-C3 (strike RM4.70) and TOPGLOV-C10 (strike RM5.00). Effective gearing for them are lower at 3.28-4.14x, although they offer more buffer against time decay should the underlying share price take longer to perform (time to expiry: 4-8 months)

Source: Kenanga Research - 21 Nov 2016