Top Glove Corporation - Benefits from improved operating conditions BUY

- We reaffirm our BUY recommendation on Top Glove Corp (Top Glove), but with a higher fair value of RM6.50/share (RM6.30/share previously) based on an unchanged 19x PE against an upward revised FY13F earnings.

- Top Glove’s FY12 net profit rebounded by 78.8% YoY to come in at RM202mil (FY11: RM113mil). This is in line with our, but slightly above market estimates.

- Revenue also improved, albeit by a softer 10%. Glove sales volume rose by 11% in FY12, reflecting improved demand for rubber gloves stemming from a downward revision in ASP. This is in tandem with the easing of latex prices (YoY decline of 17.3% to RM7.36/kg) and the strengthening of USD against RM (+2% from RM3.05 in FY11 to RM3.11 in FY12).

- The improved operating environment enabled most of  Top Glove’s increase in revenue to filter down to its bottom line. EBITDA margin recovered from its all-time low of 10.1% in FY11 to 13.4% in FY12. 

- Going forward, we expect EBITDA margin to expand slightly to ~13.8%, a tad below its historical average of 14% based on our belief that:- (1) latex prices will remain between RM6.00/kg- RM6.50/kg (4Q12 average: RM6.25/kg; YTD: -5.3%) mainly due to the weakening rubber demand from the prolonged slump in the global automobile industry, and (2) the USD will continue to strengthen against RM (1USD:RM3.10). 

- We have raised Top Glove’s capex to RM220mil per annum for FY13F and FY14F to account for:-  (1) RM125mil for  plant maintenance, upgrading and expansion (glove capacity to increase by 12% to 44.8bil pieces/yr in FY13F); (2) RM60mil for the construction of Top Glove’s new corporate headquarters in Setia City; and (3) RM35mil investment costs for its upstream plantation venture. 

- Incorporating our latest assumptions, we have tweaked upwards our earnings for FY13F and FY14F by 2%-3%. We now estimate FY13F earnings to grow by 5% to RM212mil and a further 5.5% in FY14F to RM224mil. 

- Top Glove has declared a final single-tier dividend of 9 sen/share, bringing its total FY12 dividends to 16 sen/share. In line with management’s intention to maintain a dividend payout ratio of 50%, we have assumed gross DPS of 17 sen and 18 sen for FY13F and FY14F, respectively. This translates into dividend yields of 3.3% and 3.5%.

- We continue to like Top Glove as its portfolio mix of 80:20 (natural:synthetic) places it at an attractive position to reap the benefits of stable latex price amid resilient demand.

Source: AmeSecurities