Top Glove Corporation - OUTPERFORM - 27 June 2012

We expect a higher margin for Topglove as it is likely to benefit from the lower latex price, which has fallen by about 26% YoY as well as the appreciation of the USD/MYR (which has  appreciated by c.5% from RM3.02/USD in 3Q11 to RM3.17/USD currently). We expect a re-rating catalyst for Topglove as it has  the most exposure to natural latex glove production (at 59%  of its cost). We thus maintain our OUTPERFORM rating.  Our target price (TP) is also maintained at RM5.80 based on an unchanged targeted PER valuation of 17.7x on FY12 EPS. 

Favourable latex price and USD/MYR appreciation.  We expect a higher margin for Topglove as it is likely to benefit from the lower latex price and the appreciation of the USD/MYR. Latex price, which makes up 59% of its cost, has fallen by about 26% on a YoY basis for the quarter (from 3Q11: RM10.11/kg to 3Q12: RM7.52/kg). On the other hand,  ringgit has  also depreciated by c.5% from RM3.02/USD in 3Q11 to RM3.17/USD currently. 

Sensitivity analysis favours Topglove the most.  We also did a sensitivity analysis on Topglove and we expect a potential earnings boosts of 27% for every 25 sen drop in the latex price from our assumed price of RM7.00/kg. Furthermore, we also gather that glove players have recently moved to super-thin gloves (3.5g), which is similar or in-line with nitrile powder free gloves and this will  further reduce the consumption of natural rubber latex. Apart from the favourable latex price, we also analysed the impact of the USD/MYR rate on Topglove’s  bottom line and we expect a 15% change in its earnings for every 1% change in the foreign exchange rate. Meanwhile, we continue to believe that the overall demand growth for gloves still remains healthy, allowing glove makers to continue being price makers and passing on any cost increases to customers. 

Venturing into rubber plantation. In order to mitigate any  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 activities  and facilities) for the project cost is RM160m, spread over a planting period of 6 years. According to management, the yield per annum is estimated at 4.2 tonnes per hectare. Based on our estimate, this will generate between 15%-20% of Top Glove’s current annual latex consumption. 

OUTPERFORM reiterated.  We have earlier upgraded our earnings for Topglove on the back of a potential margin expansion due to the lower latex price and the depreciating in ringgit. This offers  a re-rating catalyst for Topglove as it has the most exposure to natural latex glove production. Hence, we are maintaining our OUTPERFORM rating on  the stock as the current share price now offers a 19% upside for the stock as measured against our TP of RM5.80. We maintain our target price (TP) at RM5.80 based on an unchanged targeted PER valuation of 17.7x on FY12 EPS.

Source: Kenanga