Top Glove Corporation - 1QFY13 within expectations

Period    1QFY13/3MFY13

Actual vs. Expectations   The reported net profit of RM57.5m (+83% y-o-y; -9.5% q-o-q) appears to be in line with expectations at 25%-26% of our and consensus full-year net profit forecasts.

 However, excluding forex loss and fair value gain on forex contracts, the 1QFY13 net profit of RM45 (+1.5% y-o-y; -34% q-o-q) came in marginally below expectations at 22% and 20% of ours and the consensus full-year net profit forecasts.

Dividends   No dividend was declared in the quarter. 

Key Result Highlights   YoY, the 1QFY13 revenue rose 5.4% marginally to RM584m due to a higher volume sales (+23%) which more than offset the lower ASP (-14%). However, the EBITDA rose faster than the turnover to RM89m (+54% y-o-y) due to a sharp drop in raw material prices. Latex prices declined by 30% (from an average of RM8.34/kg in 1QFY2012 to RM5.83/kg in 1QFY2013) while nitrile prices fell by 31% (from an average of USD2.06/kg in 1QFY2012 to USD1.42/kg in 1QFY2013). The higher effective tax rate in 1QFY13 compared to 4QFY12 was largely due to a write-back of tax overprovision coupled with a one-off RM8.7m recognition of deferred tax assets back in 4QFY12. 

 QoQ, the revenue fell 4% due to higher volume sales (+6%) but this was more than offset by the lower ASP (-6%) and the strengthening of the Ringgit vs. USD (1Q13: RM3.08, 4Q12: RM3.17). The EBIT margin improved by 100bps due to the latex prices declining by 14% (from an average of RM6.76/kg in 4QFY2012 to RM5.83/kg in 1QFY2013).

Outlook   In a nutshell, the group will continue to grow via (i) capacity expansion, (ii) better utilisation and (iii) a balanced capacity mix. Capacity is targeted to expand by another 4.8b pieces p.a. by end-FY13 and 1.8b pieces p.a. by end-FY14 mainly for nitrile gloves production. 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 slower as the demand from Latin America remains strong. 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 respectively. As such, the PBT margin is expected to be sustained above 10% throughout FY13  and FY14. 

 The effective tax rate is expected to normalise to around 21%.

Change to Forecasts    No change to our forecasts.

 

Rating    Maintain MARKET PERFORM

Valuation    Our target price (TP) has been revised up to RM6.00 (from RM5.65) as we rolled over our valuation to FY14. The TP is based an an unchanged 15x PER on its FY14 EPS.  

 Nonetheless, should the share price continue to strengthen, we may consider to downgrade the rating to an UNDERPERFORM as we believe its short term price catalyst could have been priced in and the stock may not benefit much from the recent trend of consolidation due to its size and premium valuations.

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

Source: Kenanga