Friday, 15 March 2013

Top Glove Corporation - 2QFY13 results hit by minimum wage

Period  2QFY13/1HFY13

Actual vs. Expectations  The 1HFY13 net profit of RM108m (+27% y-o-y) came in within expectations at 48% of ours and the consensus full-year net profit forecasts.

Dividends  No dividend was declared in the quarter.

Key Result Highlights  YoY, the 2QFY13 revenue rose 5% to RM576m due to the higher volume sales (+20%) but this was partially negated by a lower average selling price (ASP) (-13%). Nitrile registered the highest sales volume growth at 46% with the rest being latex powdered (+16%), latex powdered-free (+10%), which in combination more than offset a lower surgical (-23%). In terms of product mix, latex gloves accounted for 74% (2QFY12: 78%; 1QF13: 75%) and nitrile at 17% (2QFY12: 14%; 1QF13: 16%). The remaining balance was made up by vinyl and surgical. EBITDA fell 2ppts to 14% from 16% in 2QFY12 as it was hit by an RM8m increase in salaries due to the effect of the minimum wage policy despite lower raw material prices. Latex price declined by 15.3% (from an average of RM6.81/kg in 2QFY12 to RM5.77/kg in 2QFY13) while nitrile price fell by 28.2% (from an average of USD1.70/kg in 2QFY12 to USD1.22/kg in 2QFY13). The lower effective tax rate (ETR) in 2QFY13 compared to 2QFY12 was largely due to a RM2.5m recognition of deferred tax assets for unutilised tax allowances, as well as the tax-free status of its overseas subsidiaries. This brought the final net profit to RM50.4m (-6% YoY; -12% QoQ).

 QoQ, the 2QFY13 revenue fell 1.4% as lower ASPs (-3%) negated the higher volume sales (+3%) in the quarter.

 YTD, the 1HFY13 revenue rose 5.2% YoY to RM1.2b, driven by higher volume sales (+22%) that more than offset lower the lower ASPs (-12%). The EBITDA margin rose 2ppts to 15% compared to 13% in 1HFY12 due to a lower latex price (-23%) and the adverse hit from the minimum wage policy in 2QFY13. This brought the overall 1HFY13 net profit to RM108 (+27% YoY), helped also by a lower effective tax rate arising from unutilised tax allowances as well as due to the tax-free status of its overseas subsidiaries.

Outlook/ Takeaways from results briefing  We understand that effective Feb 2013, Top Glove has raised its rubber glove ASPs by between USD1.00/1000 pieces to USD1.50/1000 pieces or 3% to 5% to between USD29/1000 pieces and USD32/1000 pieces with effect from Feb 2013 to mitigate the effect of the minimum wage policy. We have already factored these rises into our earnings model. Due to the minimum wage policy, Top Glove will incur an additional labour cost of RM4.0m per month on average or RM48m p.a. (21% of its FY13 net profit).  To further reduce its reliance on manual workers in order to minimise the effects of the minimum wage policy, Top Glove has invested in the automation and computerisation of its manufacturing processes and this is expected to be completed by mid-2013. Top Glove expects a cost saving of RM2m per month or RM24m p.a. on its labour costs from the move above.

 Assuming that: (i) levies are borne by foreign workers; (ii) ASPs increase of 3-5% and (iii) a RM24m in labour cost savings p.a. from its automation move, the minimum wage policy is expected to hit Top Glove’s FY13 bottom line by 7.0% based on our back-of-the-envelope calculation.

 Its growth, going forward, is expected to come from its capacity expansion involving an additional 7.6b pieces of gloves, or by 16% to a total of 48b over FY13 and FY14, largely to come from the rise in tis nitrile gloves production. With the strong demand for nitrile glove, specifically in the US, Europe and Japan; Top Glove is targeting the segment to account for 25% of its product mix in the future from its current share of 17%.

Change to Forecasts  No changes to our forecasts and our MARKET PERFORM rating.

Valuation  We are maintaining our target price of RM6.00 based on 15x multiple of FY14E EPS.

Risks  Lower than expected volume sales and inability to pass through its higher wage cost to customers via higher ASPs.

Source: Kenanga

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