Monday 19 March 2012

Top Glove Corporation - MARKET PERFORM - 16 March 2012


Top Glove reported a 1H12 net earnings of RM84.9m, which was above ours (65%) but in line with the consensus (55%) estimates. QoQ earnings increased by 70% with an improved margins of 9.7% (vs 5.7% in 1Q12) due primarily to a lower latex price, which has retraced by 18% on a QoQ basis. YoY, the quarter’s earnings have also improved by 110%. However, the latex price has rebounded and is now hovering around RM7.93/kg, which may see some margins compression in the next quarter. Nonetheless, due to the impressive results, we have increased our earnings forecasts for FY12 and FY13 by 17% and 27% respectively. As a result, we are upgrading our target price from RM3.74 to RM4.36 and raising our UNDERPERFORM rating on Top Glove to a MARKET PERFORM.

Above estimates. Top Glove’s 1HFY12 net earnings of RM84.9m were above our expectations, making up 65% of our forecast. The results were, however, in line with the consensus estimate as it makes up 55% of the consensus number. There was an improvement in the earnings on both a QoQ and YoY basis, which went up by 70% and 110% respectively. Margins have also risen from 5.2% to 9.7%. This is due to a lower latex price, which retraced by 18% during the quarter. Meanwhile, the average USD in 2Q12 has strengthened against the Ringgit by 2% from RM3.07/USD in 1Q to RM3.13/USD in 2Q), which resulted  in  a  net  gain  in  foreign  exchange  of  RM15.8m  (vs.  last quarter’s net loss of RM16m).

Favourable latex price.  Latex price (2Q: RM6.81/kg), which makes up 59% of the cost, has retreated by about 18% and 25% respectively on a QoQ and YoY basis for the quarter (1Q12: RM8.34/kg and 2Q11: RM9.10/kg). However, the price has since rebounded and is now hovering around RM7.93/kg. Hence, we may see some margins compression for the next quarter given the higher latex price now and the timing difference in the depreciation of the USD. 

Venturing into rubber plantation. In order to mitigate latex cost increases in the future, Top Glove has started venturing into the upstream business by acquiring a piece of land with a total area of about 10,000 hectares (net planted area is 8,000 hectares) for its rubber plantation in Cambodia. Total capex (including land, planting and facilities) for the project cost is RM160m, spread over a planting period of 6 years. According to management, yield per annum is estimated at 4.2 tonnes per hectare. Based on our estimate, this would generate between 15%-20% of Top Glove’s current annual latex consumption. 

Recommendation. Due to the strong results, we have increased our earnings forecasts for FY12 and FY13 by 17% and 27% respectively. Hence, we are upgrading our target price from RM3.74 to RM4.36. Our valuation is based on 17.7x FY12 EPS. With the increase in the target price, we are also upgrading our call on Top Glove to a MARKET PERFORM from an UNDERPERFORM previously.

Source: Kenanga

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