We upgrade Top Glove to BUY  from Neutral, with  an  unchanged TP  of MYR5.06 (11.5% upside, 17x FY15F P/E). The recent sell-down has led to the  stock  being  traded  at  a  more  attractive  valuation.  At  yesterday’sbriefing,  management  gave  clearer  guidance  on  future  growth  plans, which  include  focusing  on  production  efficiency.  Still,  we  advise investors to be cautious due to the volatility in the equity market.

Key  takeaways.  We  attended  Top  Glove’s  analyst  briefing  yesterday. Key takeaways were: i) global demand growth for healthcare is expected to be c.8% per annum, ii) its margins have compressed due to intense competition, iii) it will continue to increase its nitrile production capacity, and iv) the surge in demand for gloves  from the Ebola outbreak may not be  substantial  at  this  moment  but  management  expects  more  orders from countries like Spain, Denmark and the UK, where its clients supply to global bodies like the World Health Organisation (WHO) and United Nations Educational, Scientific and Cultural Organisation (UNESCO). 

Capacity  expansion.  Management  guided  that  its  2015  production capacity will rise to 2.0bn pieces per annum before increasing to 4.4bn pieces  per  annum  in  2016.  By  Sep  2016,  it  expects  total  installed capacity  to  hit  49bn  pieces  per  annum  (42.6bn  pieces  currently).  Top Glove  has  allocated  capex  of  MYR200m  each  for  FY15  and  FY16 respectively, and has set aside MYR150m for possible acquisitions. The expansion plan will focus on boosting its nitrile glove capacity in tandem with growing demand. It will also continue to better production efficiency to mitigate the margin erosion that comes from intense competition and escalating operating expenses (electricity, fuel prices etc).   

Efficiency  is  the  key.  Going  forward,  we  think  that  competition  within the  industry  may  remain  intense  and  glove  makers  would  need  to continue  to  focus  on  improving  production  efficiency  to  mitigate  the downward pressure on their earnings margins.

Raise  to  BUY.  We  upgrade  Top  Glove  to  BUY  (vs  Neutral)  with unchanged MYR5.06 TP pegged to a 17x FY15F P/E, the  mean of its historical trading band. The recent selldown has led to it being traded at more attractive valuations. Top Glove has solid fundamentals, ie a robust balance sheet (net  cash), healthy cash flow and decent dividend yields of  3.3-3.5%.  However,  as  market  conditions  are  volatile,  we  advise investors to be cautious.  

Source: RHB