Top  Glove’s  1HFY14  results  came  in  below  our  and  market expectations,  at  40%  and  41%  of  the  respective  full-year  forecasts.  We continue to anticipate a challenging environment  as its production mix is  still  heavily  tilted  towards  natural  rubber  (NR)  gloves.  Maintain NEUTRAL,  with  our  TP  adjusted  lower  to  MYR5.67  (from  MYR6.34), following our earnings downgrade.  
 
Below  expectations.  Top Glove’s 1HFY14 results were  short  on  our and consensus expectations, making up 40% and 41% of the respective full-year forecasts. The group’s 1HFY14  revenue  dipped  3.3%  y-o-y  to MYR1,122.3m  owing  to  falling  average  selling  prices  (ASPs),  led  by lower  raw material  costs.  Meanwhile,  1HFY14  earnings  declined  14.8% y-o-y  to  MYR91.8m  due  to  competitive  pricing  pressure  in  both  the  NR and nitrile gloves segments.   

Weak  q-o-q  performance.  In  2QFY14,  revenue  slipped  4.5%  q-o-q  to MYR548.3m, mainly owing to lower ASPs, while EBIT tumbled 17.9% q-o-q due to forex losses amounting to MYR8.3m during the quarter. This in turn caused 2QFY14 earnings to drop 17.3% q-o-q and 17.4% y-o-y to MYR41.6m. The decline was also partly attributed to MYR5.4m in losses arising from its China operations during the quarter under review.  

Reducing earnings estimates. In view of mounting pricing pressure on gloves,  we  cut  our  FY14/15F  earnings  forecasts  by  16.3%/19.4%  to factor in lower ASP assumptions. We believe that the higher contribution from the group’s nitrile gloves will be somewhat offset by lower margins from NR gloves in the coming quarters.  

Maintain NEUTRAL. We reiterate our NEUTRAL call on Top Glove, as we believe the world’s biggest glove  manufacturer  will  continue  to  face challenges as its production capacity is still significantly skewed towards NR  gloves  (77:23)  despite  the  shift  in  global  demand  towards  nitrile gloves.  Following  our  earnings  downgrade,  we  adjust  our  TP  lower  to MYR5.67  (from  MYR6.34).  This  is  based  on  a  17x  P/E,  as  we  roll  over our  valuations  to  FY15  EPS,  which  is  line  with  the  stock’s  5-year historical trading band.

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Financial Exhibits

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Company Profile

Top Glove Corporation is an investment holding company whose subsidiaries’ principal activities are in the manufacturing and sale of medical gloves.

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Source: RHB