We recently hosted Top Glove at a corporate luncheon. While itsprospects remain intact, we believe that the counter’s 75% YTD gain implies that much of the positive news has been priced in. W e downgrade our recommendation to NEUTRAL (from Buy) on valuation grounds, with a revised TP of MYR8.17 (from MYR7.02, 3.4% upside).
Robust nitrile glove demand. Top Glove revealed that demand fornitrile gloves has improved since 4Q14. Its lead time (the duration between the placement and delivery of orders) for nitrile gloves in 1Q15 has risen to 50-60 days from 40-50 days in 4Q14, which pointed tohigher demand intensity. During 1Q15, the company recorded a 14.7% QoQ growth in nitrile glove volume, outpacing the industry volume growth average of 7.6%. As a proportion of Malaysia’s total rubber gloveexports, nitrile glove exports grew to 56% in 1Q15 from 51% in 4Q14.
Margin sustainability . We are pleasantly surprised at the results of Top Glove’s automation drive. Management does not expect the absorption of the recent hike in gas tariff to impact margins as it believes that the rewards from the automation drive would more than offset the rise in fuel costs. As such, it expects margin expansion to be sustainable going forward. Top Glove’s EBIT margin expanded to 15.4% in 3QFY15 (Aug), from 12.9% in 2QFY15. The company is currently sitting on MYR221.2m in cash and is on the lookout for o pportunities that could add value to its existing operations, such as ceramic glove formers or packaging materials.
Forecasts & risks. We adjust our assumptions and revise up our FY15-17F estimates by 1-4% after updating our USD forex assumption to MYR3.75 (from MYR3.50) to account for the weaker MYR. The downside risk to our recommendation is heightened competition within the industry that might compress margins, while upside risks include afurther weakening of the MYR.
Downgrade to NEUTRAL. While Top Glove’s growth prospects are intact, with a 17.5% EPS CAGR for FY15F-17F, we believe that this is already reflected in the price as the stock has gained by 75% YTD. Top Glove trades at a 18.2x FY16F P/E, slightly above its historical +2SD trading band of 18.1x P/E. We reiterate our NEUTRAL call, with a revised DCF-based TP of MYR8.17 (COE: 9%, TG:2%, 3.4% upside), implying a 18.8x FY16F P/E.
Source: RHB Research - 7 Aug 2015
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