Top Glove wants to source for its own latex (7113)

TOP Glove Corp Bhd
became the first rubber glove maker to move upstream by acquiring its
own rubber plantation land to ensure a consistent supply of latex.
In June, it paid RM22mil for a 95% stake in PT Agro Pratama Sejahtera for some 30,000ha of green field rubber plantation land in Indonesia.
Assuming that the land is fully planted, it will provide up to 50% of Top Glove's current latex consumption.

[You must be registered and logged in to see this image.] Lim:
‘We are confident that investing in both upstream and downstream
activities will generate more productivity and income. Thus, we are
able to enhance our shareholders’ value and wealth.’ Top Glove's current capacity is 40 billion pieces of gloves per year.
At
for the purchase price of RM22mil, it translates to RM715 per ha, which
is also 35% cheaper than rubber land in Cambodia, according to
AmResearch.
As Top Glove's target is to secure up to 40% of its its own latex supply, chairman Tan Sr Lim Wee Chai says the company will continue to source for other suitable plantation land in and around the region.
Top Glove's rationale for moving upstream is to mitigate the volatility of future rubber prices and its financial performance.
While
there are some analysts who feel that Top Glove is better off spending
its money on branding and improving its processes, Lim disagrees.
He acknowledges that rubber planting is a high capital expenditure game with a long gestation period.
However,
he also feels that Top Glove's situation is different as it has the
size, volume and cashflow. The company has cash of RM300mil.
Other rubber glove manufacturers may not be able to undertake this capital intensive project, as they have yet to achieve scale.
An analyst agrees. She says that Top Glove's move will mitigate some risk whether or not latex prices are high.
“Buying
the land is more to mitigate risk rather than to make money. If latex
prices are high, Top Glove benefits because it will have in-house
supply of rubber to smoothen its earnings.
“When latex prices
are low, it will also continue to benefit, as it can buy from the open
market or use its own supply,” says the analyst.
She adds that Top Glove has a strong balance sheet and has the financial muscle to undertake this project.
For smaller players to have their own rubber plantation land may be considered risky.
The analyst from AmResearch estimates the acquisition will sufficiently meet 35% to 40% of Top Glove's latex requirements.
Latex accounts for 60% of Top Glove's total operating costs during its third quarter ended May 31.
Top
Glove has allocated RM450mil for the rubber plantation project over 13
years, and this is inclusive of land cost, clearing, preparation,
infrastructure, seedlings and maintenance up to maturity stage.
“Our plan is to spread the planting in stages over eight years and with a gestation period of six years before maturity.
“The
total development will span over 13 years. So it is not that expensive
as it is spread out over 10 years. More importantly, if we do not start
now, even in 20 years we still have nothing. Zero. We must start
somewhere. We are in the business for the long term,” says Lim.
The analyst points out that all glove companies have different strategies.
Some
choose to improve their branding while in Top Glove's case, it is
always the leader in capacity and volume. Thus, based on these targets,
having its own rubber plantation land will be in the right move.
Lim adds that the RM450mil capital expenditure outlay will be spent over 13 years, averaging RM35mil per year.
“This
can be funded using internal funds. Keep in mind, after seven years,
the initial planting will be harvested and eventually it could be
self-funded by the plantation project itself. We expect to see results
from year seven onwards once our initial planting is harvested,” says
Lim.
On this note, Lim adds that branding and improving
processes are also the company's priority, and Top Glove continues to
invest in research and development as well as marketing.
“We are
confident that investing in both upstream and downstream activities
will generate more productivity and income. Thus, we are able to
enhance our shareholders' value and wealth,” says Lim.

Company Result

Top Glove Corp Bhd - Splendid Performance Maintained

Result

- Top Glove raked in RM607.2m of revenue and RM63.5m of net profit in 4QFY2012, bringing total revenue and net profit to RM2.31b and RM202.2m respectively. The full-year turnover was 12.7% higher vis-à-vis FY2011, while net earnings rose significantly by 78.8% yoy as the Group rebounded from the disastrous FY2011.

- Full year result well above expectation. The Group’s net earnings in FY2012 accounted for 110.7% and 106.2% of our and consensus’ forecasts respectively mainly due to better sales and improved profit margin. Meanwhile, revenue was well within expectations by meeting 101.7% of our full year estimate and 99.9% of the street’s.


Comment

- Sales hitting another new high – 4QFY12 revenue of RM607.2m was yet another record high achieved by the Group after the previous quarter. Full year revenue booked was RM2.31b, a 12.7% increase from RM2.05b in FY2011. The encouraging sales indicated the rising demand for both latex and nitrile gloves despite the slowdown in the global economy. The rubber glove industry continues to show its resilient nature as a proxy to the healthcare industry.

- Margin lifted by the lower latex price – Average latex price in FY2012 tumbled 21.4% to RM7.19/kg from RM9.15/kg in FY2011 as European debt woes and slowing China economy reduced the demand of the rubber. Capitalizing on the situation, Top Glove managed to expand its operating margin to 10.4% from 7% a year ago. Similarly, net margin was much improved at 8.7% from 5.5% in FY2011. As a result, its earnings climbed 78.8% to RM202.2m from RM113.1 in FY2011.

- Uphill task ahead – While Top Glove concluded its FY2012 with impressive performance, it may face challenge to maintain the strong earnings momentum. The latex price is on a rising trend as a result of the major rubber exporters’ actions to withdraw export and slowdown on rubber replant. Furthermore, the rubber supply is expected to constrain with the monsoon season approaches. However, we expect the upward pressure to be partially negated by the sluggish global demand as the automotive industry in China is still yet to recover. Thus, we do not foresee the rubber price to breach the RM7/kg level in a short run.

- Proposing a dividend of 9 sen per share – The proposed dividend of 9 sen per share in 4QFY12 brings the full-year dividend to 16 sen per share, which translates into dividend yield of 3.1%.


Earnings Outlook/Revision

- We are keeping our earnings forecast for FY2013F-2014F as we do not expect the rubber price to soar above RM7/kg level.


Valuation & Recommendation

- Maintain BUY with a higher Target Price of RM5.78 – We derive our TP of RM5.78 by ascribing 16.5x FY2013 PER, which is close to its 5-year average PE. Our TP represents an upside of 12.2% from the closing price of RM5.15. The share price gained 10.5% since our latest report issued on 15/06/2012. The eye-catching result suggests Top Glove is well on track to consolidate its position as the market leader following the FY2011 misery performance.

(Source: JF Apex)