The recent pause in Dollar strength these past two weeks have caused share prices of exporters to pull back, not least the rubber glove makers who were also been hit by weaker-than-expected 3QCY16 earnings. TOPGLOV, in particular, has seen its share prices retreating after briefly notching a six-month high of RM5.34 barely a month back. On Friday, TOPGLOV finished at RM4.92; 5.0 (1.0%) sen lower for the day.

Nevertheless, we are still positive on TOPGLOV’s prospects, and currently have an OUTPERFORM call on the stock with a RM6.10 target price. We believe that subsequent quarter’s earnings are set to improve gradually, driven by cost pass-through via hikes in ASPs, abating price competition and sustained demand growth for rubber gloves. Additionally, there are near-term catalysts, including the company’s plans to raise production capacity by another 12.2b pieces of gloves to 58.8b (+26% increase).

From a charting perspective, TOPGLOV’s share price has now pulled back to its uptrend channel support at RM4.80/4.87 where bargain hunting activities have emerged. From here, we expect the overall technical picture to favour a move to the upside towards RM5.30/RM5.34. Investors who wish to gain a leveraged exposure should consider TOPGLOV-C6 (strike RM5.15) which currently offers a high effective gearing of 10.3x. This means that a modest 7.7% gain on the underlying price to RM5.30 would (all else remaining the same) translate to an outsized gain of 79% return on TOPGLOV-C6.

Structured Warrant Strategy:

Currently, there are six call warrants to choose from. However, since we expect a gradual climb towards RM5.30 (+7.7%) over the next 1-2 months, investors should opt for a more conservative approach with Call Warrants that are: (1) Close-To-The-Money or In-The-Money, (2) sufficiently long-dated which are less susceptible to time decay, and (3) reasonably priced with low implied volatilities. For these reasons, we would avoid TOPGLOV-C1 (strike RM7.09) and TOPGLOV-C2 (strike RM7.44)

Source: Kenanga Research - 13 Dec 2016