Top Glove’s FY13’s MYR195.9m net profit came in within both our and consensus full-year expectations – 95.4% and 94.5% respectively. In view of the strong competitive pressure in the natural rubber (NR) glove segment, we downgrade our FV to MYR6.34 (from MYR7.01), pegged to an unchanged 17x FY14F EPS, which is in line with our FY14F earnings downgrade. We also downgrade our NEUTRAL call (from BUY).

- Within expectations. Top Glove’s FY13’s MYR2,313.2m revenue remained flat y-o-y, due to lower ASPs for its NR latex gloves, although this was offset by the decline in raw material costs. The group’s net profit declined 3.1% y-o-y in spite of an 18% increase in its y-o-y sales volume, which we attributed to lower ASPs as a result of the competitive pressure in the NR segment.

- Revising estimates. In view of the aforementioned competitive pressure in the NR segment, we are cut our earnings FY14/15 forecasts by 11.7%/ 19.7%. We are also forecasting for a net profit of MYR230.5m and MYR246.3m for the next two FYs.  

- Nitrile expansion.  Going forward, Top Glove plans on growing its nitrile glove production capacity, which will see its annual production capacity increasing to 46bn pieces per annum by June 2014 from 44bn pieces currently.

- Offer on the table. Last Friday, Top Glove made a proposal to acquire Medi-Flex (MDFX SP, NR) for 15 cents per share. We believe that the offer price is reasonable, given that MDFX is trading at a 15.4% premium to its last closing price. The acquisition of the remaining 20.23% stake in rubber glove manufacturer will cost around MYR71.8m and will be funded via borrowings. As of 31 Aug 2013, Top Glove is in a net cash position of MYR123.1m.

Company Highlights

FY13 results within expectations. Top Glove’s FY13 net profit of MYR195.9m came in within both our and consensus full-year expectations, or 95.4% and 94.5% respectively. The group’s FY13 revenue of MYR2,314.4m remained flat y-o-y, due to lower ASPs for its natural rubber latex gloves, although the decline in raw material costs did offset this. However, despite an 18% y-o-y increase in sales volume, Top Glove’s earnings declined 3.1% y-o-y, which we attribute to lower ASPs experienced during the period under review as a result of competitive pressure in the NR gloves segment. On a quarterly basis, the group recorded 4QFY13 revenue of MYR548.2m, which dipped 9.3% q-o-q, although net profit climbed 18.6%. The latter was primarily due to the growth of its nitrile segment from its product mix, which now stands at 25% (from 18%). Top Glove also proposed a final single tier dividend of 9 sen per share, which translates into a total FY13 dividend payout of 16 sen if approved at its upcoming AGM.

Cutting estimates. In view of the strong competitive pressure stemming from the NR glove segment, we are cutting our ASP assumption by 9% to USD25.00 per 1,000 pieces of NR gloves (from USD27.50 per 1,000 pieces). With that, our FY14F/15F earnings forecast have decreased by 11.7%/19.7%. We are also forecasting for a net profit of MYR230.5 and MYR246.3m for the next two FYs. 

Nitrile expansion. Moving forward, Top Glove will focus on growing its nitrile glove production capacity and will eventually see its annual production capacity increasing to 46bn pieces per annum by June 2014 (from 44bn pieces). This will be bolstered by two new factories (F27 and F29) in Lukut, Negeri Sembilan, and Klang, Selangor, which will add 0.6bn and 1.6bn pieces respectively to its total production capacity. We believe that this will potentially lift the group’s earnings moving forward, as it aims for a more balanced product mix of 50% nitrile and 50% NR, which will reinforce its leading market position as the world’s largest glove manufacturer.

Privatisation offer on the table. On a side note, Top Glove announced last Friday that it was acquiring the entire business of SGX-listed MDFX at an offer price of 15 cents per share. The former is the latter’s single largest shareholder, with a collective stake of 79.77%. The remaining 20.23% stake will be acquired to the tune of approximately MYR71.8m, after which the group intends to delist MDFX. This exercise will be fully funded via borrowings. Note that, as at end-August, Top Glove sits on a net cash balance of MYR123.1m.

That said, we are encouraged by this development, given MDFX’s improved performance (with FY13 earnings surging up >100% y-o-y), which we believe will enhance additional earnings for Top Glove. We believe that the offer price is reasonable, based on MDFX’s last closing price of 13 cents per share, which represents a 15.4% premium.

Downgrade to NEUTRAL (from Buy). With that, coupled with our FY14F earnings downgrade, we lower our FV to MY6.34 (from MYR7.01), based on an unchanged 17x FY14F EPS (in line with the average 3-year historical average P/E of 17.2x). We believe that Top Glove should trade at a discount to Hartalega (HART MK, BUY, TP: MYR7.95)’s 20x FY14F PE, given the latter’s superior net margins of 22.8% vis-à-vis Top Glove’s 8.5%. Additionally, HART also has the lead in technology and automated processes.

Source: RHB