Top Glove’s 9MFY14 net profit was below our and street estimates  on lower revenue booked. This was due to  lower ASPs.  Its  EBITDA margin improved  due to  lower raw material costs,  but  this  was partly offset by higher utilities expenses.  It  declared a  7.0 sen  interim dividend for the quarter under review. We revise  our earnings forecast,  due to a change in analyst, with FV of MYR5.06 (from MYR5.67). Maintain BUY.

• 9MFY14 net earnings lower than expected. Top Glove’s 3QFY14’s net profit  of  MYR42.4m  improved  5.2%  y-o-y.  On  a  cumulative  basis,  its 9MFY14  earnings  of  MYR134.2m  (-9.4%  y-o-y)  were  below  our  and street  estimates,  while EBITDA margin improved by 0.5ppts y-o-y. This was due to more efficient operations, lower material costs and a stronger USD.  However,  this  was  partly  offset  by  higher  electricity  costs  and  a hike in the price of  natural gas, which  came into effect this year.  Its total sales  volume  for  9MFY14  increased  by  2%  y-o-y,  but  revenue  slipped 3.9% y-o-y on lower ASPs. Note that the latter was due to the  lower raw material prices as well as intense competition.
• Disposes of loss-making plant.  Top Glove  completed the disposal of its loss-making Factory-8 plant  in China  on  13 June 2014 as part of its ongoing  cost  rationalisation  and  business  streamlining  strategy  to enhance efficiency. Its  remaining factory  there, Factory-15,  is expected to  contribute  positively  to  operations,  moving  forward.  Management believes  that the  growth of global rubber gloves demand  has moderated to 5-8% (from 8-10%) due to a larger base. It also believes that, moving forward,  the  price  of  natural  rubber  is  not  expected  to  increase drastically,  as demand has not significantly improved yet. As such,  the ASP for natural rubber gloves is expected to remain low.
• We maintain BUY.  This is  due to:  i)  its  solid balance sheet  –  in a  net cash  position  and  indicates  healthy  cash  flow,  ii)  the  stock  is  currently trading  at a very attractive  historical  P/E of 14x,  which is within -0.5 to  -1.0SD  from  its  5-year  historical  trading  band,  and  iii)  its  ongoing expansion,  which  is  expected  to  help  improve  efficiency.  We  trim  our earnings forecast  by 7%/8% for FY14F/15F after  adjusting our  revenue and  costs  assumptions.  Our  new  MYR5.06  FV  (from  MYR5.67)  is pegged to  a 17x FY15F  P/E (from 17x FY14F),  which is the mean of its 5-year historical trading band.

Source: RHB