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
No comments:
Post a Comment