Top Glove - 3Q driven by strong sales volume BUY

- Top Glove Corp (Top Glove) posted a higher 9MFY12 core net profit (YoY: 63%) which came in ahead of both our, and market, expectations, accounting for 87% of our initial forecast and 86% of consensus. 

- Consequently, we have upped our FY12F earnings forecast by 15%, and a smaller 2%-4% for FY13F-14F. This takes into account the higher-than-expected glove sales volume. Sales volume for 3Q jumped 9% on a sequential basis, higher than the 5% achieved for 2Q. More importantly, this was attributed to an overall increase in both NR and nitrile gloves. 

- 3Q core net profit of RM56mil was up 50% QoQ (excluding an EI loss of RM2.5mil due to unfavourable forex movement). However, we expect the group to book a larger unrealised forex loss for 4Q (Jun-Aug) given the highly volatile greenback. As an indication, US dollar against RM appreciated +5.6% from a month ago.

- Management declared a 1^st  single-tier interim dividend of 7 sen/share, making up 54% of our revised DPS for FY12F. Our forecast is premised on an unchanged dividend payout ratio of ~40% – on par with management guidance.

- While NR gloves remained as Top Glove’s bread-andbutter (77% of total gloves volume), it appears the group’s re-positioning as a convenient one-stop centre for glove sourcing is gaining good traction. This should somewhat stem the loss of orders as a result of consumers switching from NR to nitrile gloves.

- Looking ahead, we expect ASPs to remain flattish. As it is, SMR20 grade bulk latex price continues to extend its downward trend post-rubber trees wintering season. We maintain our latex price assumption of RM6.00-RM6.50/kg, underpinned by our long-term view of disequilibrium in global latex demand & supply situation.

- The group has budgeted RM40mil for the installation of robotic arms and auto stacking machine to partially offset the higher costs from the minimum wage policy (RM900/month effective 1 January 2013). We estimate net impact to earnings at -2% to -3% upon completion of automation process in 6 months’ time, vs. -5% to -6% without automation.

- Maintain BUY on Top Glove with a raised fair value  of RM6.30/share (vs. RM6.15/share previously) based on a target PE of 19x FY13F revised earnings (0.5SD of the stock’s 5-year mean). Despite higher labour and natural gas costs, we are not too concerned given the industrywide nature of the issues.

Source: AmeSecurities