Top Glove (TOPG)’s 1QFY14 net profit of MYR50.3m came in largely in line with our and consensus expectations,  making up 21.8% and 22.0% of  FY14  estimates  respectively.  The  global  shift  in  demand  towards nitrile gloves puts TOPG in a more challenging environment given that its capacity mix is skewed towards  the NR glove segment  (80:20). We reiterate our NEUTRAL call, with our FV unchanged at MYR6.34.

• Largely  in  line.  TOPG’s  1QFY14  net  profit  of  MYR50.3m  (flat sequentially  but  down  12.5%  y-o-y)  was  broadly  in  line  with  our  and consensus  expectations,  reaching  21.8%  and  22.0%  of  the  respective FY14 forecasts. The group’s 1QFY14 revenue of MYR573.9m (+4.7% qo-q; -1.8% y-o-y) remained relatively flat  on  lower average selling prices (ASPs)  weighed  by  lower  material  costs.  Despite  a  10%  increase  in overall sales volume, 1QFY14 core earnings dipped 12.5% y-o-y, mainly due to lower ASPs amid pricing pressure in its NR glove division while its vinyl gloves division experienced an unfavourable operating environment in  China,  where  losses  widened  to  MYR5.2m  (from  MYR0.74m  in  the last quarter).
• Nitrile expansion.  Moving forward, TOPG’s  annual production capacity will be lifted to 46bn pieces per annum by June 2014 (from 44bn pieces) ,boosted by its two new factories (F27 and F29).  However, we gather that customers  are  still  progressively  switching  to  nitrile-based  gloves  from latex-based  ones  as the trend continues to favour the former, which in turn leads to pricing pressure in the NR glove division. As of end-Aug, TOPG’s  product  mix  was  still  skewed  towards  NR  gloves,  at  80%  NR and 20% nitrile.
• Risks.  Key  risks  would  be:  i)  a  spike  in  raw  material  prices,  ii)  a depreciation of the USD, and iii) price competition within the industry.
• Maintain NEUTRAL. We maintain our NEUTRAL stance as we continue to  see  a  challenging  business  environment  for  TOPG  given  pricing pressure  in  its  NR  glove  segment,  which  will  offset  higher  contribution from  its  nitrile  gloves.  Our  MYR6.34  FV  is  pegged  to  an  existing  17x FY14 EPS, which is in line with the mean of its 5-year historical trading band.

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Company Profile
Top  Glove  Corporation  is  an investment holding company.  The  principal activities  of  its  subsidiaries  are manufacturing  and sa le  of medical gloves.

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Source: RHB