Top Glove Corporation - FY12 within expectation

Period    4Q12/FY12

Actual vs.  Expectations

 The reported FY12 net profit of RM202.2m was 6% above the consensus’ estimate of RM190.3m and 3% above our estimate of RM197.2m.

Dividends   Proposed a final net dividend of 9 sen/share. Together with the first interim net dividend of 7 sen/share, the  full year net dividend totalled 16 sen/share (vs. FY11’s 11 sen/share). 

 This payout represents a net yield of 2.3% and a payout ratio of approximately 50%. 

Key Result Highlights

 YoY, the revenue increased 13% to RM2.31b as opposed to FY11’s RM2.05b. The strong growth in sales revenue was attributed to an improvement in the sales volume on the back of higher demand. As a result, its capacity utilisation for the financial year was higher despite the additional production capacity from the factory expansion and upgrading exercise. Recall that the company’s production capacity increased by 4.75b pieces p.a.  in the last financial year. The increased efficiency, 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.

 QoQ, 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 USDstrengthened against RM by 2.6% (from RM3.07 in 3QFY12 to RM3.15 in 4QFY12). 

Outlook   The group intends to expand its operations organically (production capacity) and via the M&A route. For instance, it has recently acquired 100% equity stake in GMP Medicare S/B from Matang Manufacturing S/B for RM24.1m in line with its plan to raise global market share. 

 It has also ventured into green field rubber plantation 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 volatility of latex prices on the group’s earnings.

Change to Forecasts

 We have fine-tuned our FY13-FY14 net profit forecasts slightly to RM212.7m-RM231.2m from RM207.4mRM221.9m, representing changes of 2.5%-4.2%.

 We have also revised our FY13-FY14 NDPS from 13-14 sen to 17-18 sen, representing net dividend yields of 3.3-3.5%.

Rating  Maintain MARKET PERFORM

 While the sector could potentially see a re-rating after the recent take-over offer for Latexx Partners, we still believe that there is a high probability that RM could continue to strengthen against USD and latex prices could gradually improve due to the recent round of the Quantitative Easing programme by US. These trends could threaten the glove players' earnings growth.

 Besides, the expected upside is only ~6.8% from here.

Valuation    Raised our TP from RM5.36 to RM5.50 in tandem with the revision in our earnings forecasts. The TP is based on an unchanged targeted PER valuation of 16x on FY13 EPS.

Risks   Higher latex price and a stronger RM against the USD.  

Source: Kenanga