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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