Top Glove’s FY12 results came in ahead of expectations. The strong performance was mainly attributed to higher sales volume, competitive product pricing, increased production efficiency as well as easing raw material prices. Thoughrubber/latex prices have rebounded, they are still within our estimates and we believe the company can maintain its healthy margin and deliver good results. We continue to like Top Glove, maintaining our BUY call at a higher FV of RM6.25 after revising its FY13 earnings forecast upwards.
Beating expectations. Top Glove’s upbeat performance in FY12 beat OSK and street’s estimates by 20.1% and 6.1% respectively. Although its topline was flat q-o-q, its operating margin has improved, resulting in a stronger bottomline q-o-q. Such significant improvement in net profit for FY12 (+78.7%) was due to higher sales volume, competitive pricing, increased efficiency as well as easing raw material prices (latex price) and strengthening of the USD against RM. Top Glove has proposed a final single tier dividend of 9 sen per share, culminating in a total dividend payout of 16 sen for FYE 31 Aug 2012, which is equivalent to a payout ratio of 50% (FY11 payout ratio: 40%).
FY13 remains positive. Moving forward, we believe that Top Glove may still be able to deliver promising results in FY13. The company is currently ramping up its nitrile gloves production to achieve a balanced product mix while reducing labour costs by investing in automated production lines to mitigate the impact of the minimal wage policy, which will be enforced next year. Moreover, rubber gloves enjoy a sustainable demand growth rate of 8%-10%, buoyed by demand from the healthcare industry.
Low M&A possibility. The rubber glove industry has come into the limelight these three months due to two corporate exercises, namely the privatization of Adventa and the proposed acquisition of Latexx Partners by Semperit AG Holding. The industry is indeed consolidating but we are of the view that Top Glove is unlikely to be an M&A target due to its rich valuation. However, it might acquire some smaller private companies if the management sees any synergies that will potentially improve its efficiency.
Rubber/latex price still healthy. As conveyed earlier in our sector news flash report, rubber glove makers are comfortable with latex prices hovering at around RM6.00 to RM7.00 per kg. Therefore, although rubber/latex prices have rebounded recently, the CY12 YTD average price of around RM6.86/kg is still well within the healthy region and also within our forecast, thus posing no real threat to Top Glove or our valuation.
Beating expectations. Top Glove’s upbeat performance in FY12 beat OSK and street’s estimates by 20.1% and 6.1% respectively. Although its topline was flat q-o-q, its operating margin has improved, resulting in a stronger bottomline q-o-q. Such significant improvement in net profit for FY12 (+78.7%) was due to higher sales volume, competitive pricing, increased efficiency as well as easing raw material prices (latex price) and strengthening of the USD against RM. Top Glove has proposed a final single tier dividend of 9 sen per share, culminating in a total dividend payout of 16 sen for FYE 31 Aug 2012, which is equivalent to a payout ratio of 50% (FY11 payout ratio: 40%).
FY13 remains positive. Moving forward, we believe that Top Glove may still be able to deliver promising results in FY13. The company is currently ramping up its nitrile gloves production to achieve a balanced product mix while reducing labour costs by investing in automated production lines to mitigate the impact of the minimal wage policy, which will be enforced next year. Moreover, rubber gloves enjoy a sustainable demand growth rate of 8%-10%, buoyed by demand from the healthcare industry.
Low M&A possibility. The rubber glove industry has come into the limelight these three months due to two corporate exercises, namely the privatization of Adventa and the proposed acquisition of Latexx Partners by Semperit AG Holding. The industry is indeed consolidating but we are of the view that Top Glove is unlikely to be an M&A target due to its rich valuation. However, it might acquire some smaller private companies if the management sees any synergies that will potentially improve its efficiency.
Rubber/latex price still healthy. As conveyed earlier in our sector news flash report, rubber glove makers are comfortable with latex prices hovering at around RM6.00 to RM7.00 per kg. Therefore, although rubber/latex prices have rebounded recently, the CY12 YTD average price of around RM6.86/kg is still well within the healthy region and also within our forecast, thus posing no real threat to Top Glove or our valuation.
Maintain BUY with new FV of RM6.25. We have decided to raise our FY13 earnings forecasts for Top Glove to RM206.5m (previously RM182.7m) as we remain upbeat on the company’s solid performance. The stock is currently trading at the mean of its five-year historical PE trading band and we have decided to value it based on +0.5 STD from mean, which translates to a new FV of RM6.25, pegged to 18.7x FY13f PE. We continue to like Top Glove’s global market leadership in medical examination gloves thus we keep our BUY recommendation.
Source: OSK
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