Friday, 15 March 2013

Top Glove Corporation - An Ambitious Dream

Top Glove has stated its goal of becoming the world’s largest nitrile glove producer over the next 4-5 years. While this may appear aggresive, we note that the group has already lined up a steady pipeline of nitrile glove production lines for the next two years. With timely execution, the group could register stronger margins in the coming quarters. Maintain Buy with fair value of RM6.42.

Net profit impacted by the minimum wage policy. 2Q13 revenue declined 1.4% qoq due to a net downward revision in ASPs to pass on the lower latex cost. 2Q EBIT margin contracted by 1.4%-pts qoq mainly due to the minimum wage hike, although we understand that there was a slight increase in ASPs (US$0.50-1.00 per thousand pieces) in early-Jan to pass on the wage increase. The margin compression was also cushioned by the timelag in passing on the lower latex and nitrile prices to customers. The decline in EBIT qoq flowed down to the pre-tax level resulting in net profit declining by 12.5% qoq.

More nitrile gloves capacity coming up. In addition to three new factories coming into operations in 2013, Top Glove also announced plans to add 8 new nitrile glove production lines at its recently acquired GMP Medicare factory and construct a new factory in Klang in 2014, which in total would add 6.0bn pieces p.a. to Top Glove’s nitrile glove production capacity. In our view, the aggressive expansion into the nitrile gloves segment could lead to better margins ahead.

Forecasts. We tweaked our FY13-14 EPS forecasts by -0.1/+5.9% respectively after adjusting for the capacity coming onstream from Factory 27 and 29 and updating for ESOS shares.

Investment case. Following our earnings revision, our fair value have been raised to RM6.42 (from RM6.29) based on unchanged target CY13 PER of 15.5x. With a steady pipeline of nitrile gloves production lines coming onstream over the next two years, the group could register stronger margins in the coming quarters and move closer to its target of becoming the world’s largest nitrile glove producer. We maintain our Buy call on the stock.

Source: RHB

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