We downgrade  Top Glove to NEUTRAL  given the limited upside to our FV.  Our unchanged  FV  of  MYR5.06 is  pegged  to a  17x  FY15F P/E.  We expect  intensifying  competition  to  pressure  glove  prices  and  rising production  cost  to  hamper  earnings  growth.  Although  concerns  onspread of  the  Ebola virus  have escalated, glove  makers are not seeing any panic buying.

No  panic  buying  despite  rising  Ebola  concerns.  Concerns  on  the Ebola virus outbreak have  escalated,  but  glove  makers are not seeing any  panic  buying.  As  at  31  Aug,  3,685  cases  and  1,841  deaths  havebeen  reported  since  the  outbreak  in  March  (It  is  believed  that  the outbreak  actually  started  in  Dec  2013  but  it  was  not  detected  until March). While glove makers are not seeing any increased  buying due to the outbreak, the number of queries has been on the rise.  

Going  through  a  steep  learning  curve.  Top  Glove  is  ramping  up  its new  nitrile  gloves  production  line  in  view  of  growing  demand  and relatively  cheaper  prices  amid  a  drop  in  raw  material  prices.  However, we reckon that  the company  may need to go through a steep learning curve to catch up with its peers in the  production of  nitrile gloves. This could possibly dent margins as it goes through the learning curve.

Earnings  forecast  unchanged.  We  keep  our  earnings  forecasts  for FY14F and FY15F  unchanged,  while  expecting some degree of decline in  net profit  margins  (-0.4ppts y-o-y in FY14F;  -0.3ppts y-o-y in FY15F)as  price  competition  is  becoming  stiffer  and  other  costs  such  as electricity, gas prices and  labour costs are on the rise. These may offsetthe currently favourable raw material prices.

Downgrade to NEUTRAL  from Buy  as the share price has moved up into  our  NEUTRAL  region  from  the  bottom,  with  no  changes  to  our fundamental  views.  Our unchanged  FV  of  MYR5.06  is  pegged  to a  17xFY15F  P/E,  which  is  the  historical  average  P/E  of  Top  Glove’s  trading band.

Source: RHB