We came from a briefing with a NEUTRAL feel while the
management remains cautiously optimistic. In a nutshell, the group will
continue to grow via (i) capacity expansion, (ii) better utilisation and (iii)
a balanced capacity mix (between natural and nitrile gloves). The stock is
trading at 14.6x-13.2x to our revised FY13-FY14 EPS estimates. While we believe
that the group may not benefit much from the recent trend of consolidation due
to its size and premium valuations, we have still revised up our Target Price
to RM5.65 (from RM5.50 in line with our EPS revisions) based on a 15x PER to
its CY13 EPS of 37.7 sen. The target PER is in line with FBMKLCI’s 6-year
average. With a potential total return of 10%, we reiterate our MARKET PERFORM
rating.
To recap, in FY12, TOPGLOVE’s revenue increased 13% YoY to
RM2.31b in contrast to FY11’s RM2.05b attributed to an improvement in the sales
volume on the back of a higher demand. As a result, its capacity utilisation
was higher despite the additional production capacity of 4.75b pieces p.a. from
the factory expansion and upgrading exercise. As at end-FY12, the capacity
utilisation of the group stood at 75%. The favourable operating environment
such as the easing of the latex price (from RM8.90/kg in FY11 to RM7.36/kg in
FY12) and the strengthening of USD against RM by 2% (from RM3.05 in FY11 to
RM3.11 in FY12) boosted the PBT margin to 10.4% from 7.1% in FY11. On a QoQ comparison,
the revenue and net profit improved 1% and 18% respectively due to the
aforementioned factors. As a result, the PBT margin also improved from 10.6% in
3QFY12 to 11.1% in 4QFY12. Latex prices declined by 10.1% (from RM7.52/kg in
3QFY12 to RM6.76/kg in 4QFY12) and USD strengthened against RM by 2.6% (from
RM3.07 in 3QFY12 to RM3.15 in 4QFY12).
Going forward, we understand that the group plans to
increase its capacity by another 4.8b pieces p.a. by end-FY13 and 1.8b pieces
p.a. by end-FY14 (mainly for nitrile gloves production). With the guided output
volume growth of 10%- 15% (in terms of units), we believe that the overall
capacity utilisation should improve from 75% to ~85% and ~90% by FY13 and FY14.
As such, the PBT margin is expected to be sustained above 10% throughout FY13
and FY14.
The volume mix of nitrile gloves is expected to increase
from ~15% as at end-FY12 to ~20% by end-FY13, making nitrile gloves to be one
of the main growth drivers for the group apart from powder-free gloves. The
target market for these products is North America. Nonetheless, we understand
that the group will still continue to grow its lower-grade powder gloves sales
albeit relatively slower, as the demand from Latin America remains strong.
The effective tax rate will still be lower than the
statutory tax bracket, say 21%, due to the RM20m tax allowance for the group
from Medi-Flex’s losses. Capex is expected to be RM200m p.a. (or RM3.0b for the
next 15 years). Our dividend payout ratio assumption has also been raised from
40% in FY11 to 50%.
As for the rubber plantation, it was guided by management
that this venture needs approximately 10 years to turn cashflow-positive.
Recall that the group invested into this green-field venture via a 95% equity
stake in PT Agro Pratama Sejahtera to ensure the long term consistent supply of
latex and to mitigate the impact of the volatility in latex prices on the
group’s earnings.
Earnings and target price revisions. In line with our latest
capacity and utilisation assumptions, we have revised up our FY13-FY14 EPS from
34.4-37.4 sen to 36.4-40.2 sen, representing 6%-7% revisions. With these new
estimates and based on a minimum 50% dividend payout ratio, we are expecting
NDPS of 19-21 sen, translating into net dividend yields of 3.6%-4.0%.
Note that we have factored in fairly optimistic assumptions
– (i) average RM/USD of 3.15-3.00 and (ii) average latex price of
RM6.15-6.50/kg – into our earnings model.
Source: Kenanga
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