No bounce in rubber gloves - TOPGLOVE

by **Cals** Mon 17 Jun 2013, 11:16

No bounce in rubber gloves

Business & Markets 2013

Written by CIMB Research

Monday, 17 June 2013 10:31

Top Glove Corp Bhd
(June 14, RM6.08)
Maintain neutral at RM6.35 with a revised target price of RM6.55 (from RM5.97): Although core earnings per share (EPS) for the nine months of 2013 financial year 2013 ending Aug 31 (9MFY13) rose by 6.8% year-on-year (y-o-y), it was 20% lower quarter-on-quarter (q-o-q) due to intense competition for natural rubber and higher cost. 9MFY13 results were below expectations at 66% of our and 65% of consensus FY13 estimates. This is disappointing as we believe these issues will persist.

We cut FY13-FY15 EPS by 9%-10% due to the lower average selling prices (ASPs) but raise our target price to factor in a higher 2014 calendar year (CY14) target market price-earnings ratio (P/E) of 15.6 times versus 13.5 times before.

We now value Top Glove at 17.2 times CY14 P/E (from 14.1 times), or 10% (from 5%) above our target market P/E, in line with the 10% three-year average. The first net dividend per share (DPS) of 7 sen was in line. We stay “neutral”, as strong synthetic demand offsets weak natural rubber performance. We prefer HARTALEGA HOLDINGS BHD [].

Top Glove’s 9MFY13 revenue rose by 3.4% y-o-y, driven by a 17% y-o-y rise in overall glove sales, which offset lower selling prices for natural rubber gloves due to competition and idle capacity.

Strong nitrile demand led to a 50% y-o-y increase in glove sales. Utilisation rates were high at 90% to 100% and selling prices were firm. Demand for natural rubber gloves was also strong with sales increasing by 8% to 17% y-o-y but selling prices were competitive due to idle capacity. We estimate that the utilisation rate was only 70% to 80%. Total operating costs rose by 3.2% y-o-y due to foreign exchange losses, production line upgrades and automation expenses.

Topline growth offset the higher costs, and earnings before interest, tax, depreciation and amortisation (Ebitda) rose by 4.8% y-o-y. After a 5.4 percentage point reduction in tax rate, core net profit rose by 6.8% y-o-y.

Top Glove’s 3QFY13 revenue rose by 4.8% q-o-q but total cost rose by 8.0% q-o-q, leading to a 22.0% q-o-q decline in Ebitda and a 20.0% fall in net profit.

While natural rubber glove sales rose as high as 17% in the powder-free segment, overall demand remained weak.

Utilisation rates were poor and pricing was competitive due to idle capacity. We think this will persist as Top Glove is still 80% dependent on natural rubber gloves. — CIMB Research, June 14

This article first appeared in The Edge Financial Daily, on June 17, 2013.