We came away from Top Glove’s analyst briefing on Tuesday remaining positive on the company as well as the rubber glove sector outlook. While its expansion plans are on track, the company is continuously instituting efficiency improvements to boost profitability. Given Top Glove’s solid business model, aggressive expansion and the favourable operating environment, we maintain our BUY call and RM6.25 FV.
Still on top. Thanks to steadily easing raw material prices and a stable USD/MYR exchange rate amid improving operating efficiency, Top Glove continued to report strong earnings in 1QFY13 after reporting robust results in FY12. In view of the still favourable operating environment, we continue to remain upbeat on the company as well as the sector as a whole. Although Top Glove is ramping up its nitrile gloves production capacity, management is confident that the natural rubber gloves market remains strong and US healthcare demand will continue to grow in 2013.
No significant impact from increasing costs. Top Glove has taken the necessary steps to mitigate the impact of the minimum wage policy, which kicked off on 1 Jan 2013. Its move to automate its plants is almost 50% complete, with full automationtargeted for mid-2013. Meanwhile, management believes that Malaysian rubber glove manufacturers are still competitive given that the quantum of increase in labour cost among other rubber glove producing countries such as Thailand and Indonesia is even larger.
Staying ahead of the pack. With three new factories coming on stream, Top Glove’s total annual production capacity will hit 45.1bn pieces by August 2013. These new lines will cater for nitrile glove production. By then, the company would have a better product mix to capture both the natural rubber latex glove and nitrile glove markets. Meanwhile, Top Glove is targeting to embark on the first phase of planting with regard to its upstream venture in rubber trees plantations by October 2013, with first tapping expected in 2020. The company has guided that the estimated investment cost would be about RM450m over a 14-year period, with positive cash flow envisaged in Year 10.
Still on top. Thanks to steadily easing raw material prices and a stable USD/MYR exchange rate amid improving operating efficiency, Top Glove continued to report strong earnings in 1QFY13 after reporting robust results in FY12. In view of the still favourable operating environment, we continue to remain upbeat on the company as well as the sector as a whole. Although Top Glove is ramping up its nitrile gloves production capacity, management is confident that the natural rubber gloves market remains strong and US healthcare demand will continue to grow in 2013.
No significant impact from increasing costs. Top Glove has taken the necessary steps to mitigate the impact of the minimum wage policy, which kicked off on 1 Jan 2013. Its move to automate its plants is almost 50% complete, with full automationtargeted for mid-2013. Meanwhile, management believes that Malaysian rubber glove manufacturers are still competitive given that the quantum of increase in labour cost among other rubber glove producing countries such as Thailand and Indonesia is even larger.
Staying ahead of the pack. With three new factories coming on stream, Top Glove’s total annual production capacity will hit 45.1bn pieces by August 2013. These new lines will cater for nitrile glove production. By then, the company would have a better product mix to capture both the natural rubber latex glove and nitrile glove markets. Meanwhile, Top Glove is targeting to embark on the first phase of planting with regard to its upstream venture in rubber trees plantations by October 2013, with first tapping expected in 2020. The company has guided that the estimated investment cost would be about RM450m over a 14-year period, with positive cash flow envisaged in Year 10.
Constant quest for improvement. Armed with the world’s largest production capacity, Top Glove’s strategy is one of focusing on sales volume rather than charging high ASPs to gain premium margin from its clients. Each of its clients takes up only 3%-4% of its total production capacity; this gives it a competitive edge that effectively shields its capacity from being dominated by a single client. Moreover, the company is currently enhancing operating efficiency by hiring SAP consultants to implement solutions in production, quality management, sales and distribution, materials management and finance. With such a system in place, Top Glove aims to better arm itself to capitalize on new opportunities and in the process improve its earnings margins.
Outlook remains positive. Moving forward, Top Glove aims to strengthen its presence in Japan via clean room gloves and CPE gloves (for the food industry) in order to expand its product range and client base. It is also attempting to improve the revenue contribution from its China operations, particularly in the vinyl gloves section. As management has pointed out, significant global demand will come from China and India while increasing healthcare awareness in Africa is also another positive factor. All in, given its strong fundamentals and aggressive expansion amid a favourable operating environment and growing demand, we think that Top Glove’s prospects remain bright.
Maintain BUY, FV RM6.25. All said, we are maintaining our BUY recommendation for Top Glove and retain our RM6.25 FV, derived from 18.7x FY13 PE, which is also +0.5 SD of the stock’s five-year historical trading band.
Outlook remains positive. Moving forward, Top Glove aims to strengthen its presence in Japan via clean room gloves and CPE gloves (for the food industry) in order to expand its product range and client base. It is also attempting to improve the revenue contribution from its China operations, particularly in the vinyl gloves section. As management has pointed out, significant global demand will come from China and India while increasing healthcare awareness in Africa is also another positive factor. All in, given its strong fundamentals and aggressive expansion amid a favourable operating environment and growing demand, we think that Top Glove’s prospects remain bright.
Maintain BUY, FV RM6.25. All said, we are maintaining our BUY recommendation for Top Glove and retain our RM6.25 FV, derived from 18.7x FY13 PE, which is also +0.5 SD of the stock’s five-year historical trading band.
Source: OSK
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