Friday, 15 March 2013

Top Glove Corporation - Minimum wage bump in 2QFY13

-  We re-affirm our BUY recommendation on Top Glove Corp (Top Glove), with an unchanged fair value of RM6.50/share. We continue to peg our valuation to a PE of 19x FY13F EPS.

-  For the six months to 28 February 2013, Top Glove achieved a net profit of RM108mil, up 27% YoY. Annualised, this was in- line with our, and consensus, estimates.

-  Growing demand (sales volume +22% YoY) for both latex and nitrile gloves, coupled with its continued capacity expansion enabled Top Glove to raise its revenue by 5% YoY.

-  The group’s installed capacity is expected to grow by 19% to 48bil pcs per annum (p.a.) come April 2014. The additional 7.6bil pcs from 76 lines have been earmarked for nitrile glove production, bringing this segment’s total production contribution to 25% (2QFY13: 17%).

-  On a sequential basis, however, Top Glove’s revenue and net profit were down by 1% and 13%, respectively. The minimum wage ruling, which came into effect on 1 January 2013, struck RM8mil off its bottom line, offsetting the QoQ improvement in latex (-1%) and nitrile (-12.2%) prices.

-  We are not too concerned as we believe this is merely the result of a 2-3 month time lag as it has increased its ASPs by 3%-5% beginning March 2013.

-  In addition, efficiency improvements from its investment in automation (slated to be completed in 3Q13, savings of RM2mil per month) and enterprise-wide IT transformation (SAP ERP application) will ensure its earnings remain intact going forward.

-  YoY, Top Glove’s EBITDA margin expanded 1.7ppts in 1HFY13 to 14.8%. QoQ, the decline was 1ppt. We opine that intensifying competition in this segment would limit margin expansion.

-  Consistent with the previous years, no dividend was declared for 2QFY13. We are keeping our FY13F-FY15F dividend outlook with a 3%-4% yield, assuming a 50% payout ratio.

-  Despite being a relatively late-comer to the booming nitrile segment, we believe that Top Glove’s economies of scale, extensive customer base and healthy financials (end-February net cash of RM257mil), has enabled it to effectively rival its peers. Its ~12bilpcs of nitrile glove capacity by next year is similar to that of each of its main rivals.

-  The group is also able to capitalise on the growth in the latex glove segment given its landbank of more than 30 acres, the exit of other players and sustained demand from emerging market (Middle East and Latin America) customers.

Source: AmeSecurities

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