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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