RHB Research maintains FV for Top Glove RM4.95, market perform

KUALA LUMPUR: RHB Research Institute said Top Glove Corp's third quarter 2012 (Q3, 2012) net profit of RM53.8ilm came in within its but above consensus expectations.
It
said on Friday that on-quarter, revenue rose 9.9% on the back of a 9%
increase in sales volume and higher average selling prices.
RHB
Research said nevertheless, QQ EBITDA margin contracted by 2.2
percentage points due to higher average latex prices of RM7.52 a kg in
Q3 (versus RM6.81 a kg in Q@), resulting in a marginal increase of 0.7%
in net profit on-quarter,” it said.
“Moving forward, we expect Top Glove to benefit from the recent softening in latex prices and strengthening in US$/RM rate.
“While
we are optimistic on Top Glove's earnings outlook in the coming
quarters, we believe that the good news has largely been reflected in
the stock's price. We thus maintain our fair value of RM4.95 and Market
Perform call on the stock,” it said.

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Glove makers up in early trade
KUALA LUMPUR: Shares of glove makers Top Glove and Supermax Corp were among the major gainers in early trade on Friday on rising optimism for the industry following the softening latex prices.
At 9.28am, Top Glove and Supermax were up 10 sen each to RM4.76 and RM1.94. The interest was also spurred on by Top Glove's stronger earnings.
The FBM KLCI
was up 3.23 points to 1,574.17, off the early high of 1,578. Turnover
was 76.79 million shares valued at RM45.33mil. Advancing counters beat
decliners two to one with 144 gainers to 74 losers while 135 counters
were unchanged.
Pharmaniaga
was the top gainer, hitting limit-up or RM1.49 to RM6.48 with 404,300
shares done, when it resumed trade after meeting the puboic spread
requirements. Its major shareholder, Boustead added 17 sen to RM5.25.
UMW rose 16 sen to RM8.55, MHB and Mudajaya 10 sen each to RM5.20 and RM2.78 while Bursa added nine sen to RM6.14.
Luster-WA was the most active with 16.82 million units done, up 0.5 sen to 3.5 sen. Its shares rose 0.5 sen also to eight sen.
Nestle was the top loser, down RM1.10 to RM54.10 in thin trade while KLK lost 66 sen to RM22.20, GAB eight sen to RM13.42 and Hap Seng Plantations down seven sen to RM2.91.

Top Glove Q3 earnings double to RM53.8m

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KUALA LUMPUR: Top Glove Corporation Bhd
posted a strong set of results in the third quarter ended May 31, with
earnings surging 110% to RM53.81mil from RM25.59mil a year ago, boosted
by stronger demand for gloves especially from all the markets and lower
latex prices.
It said on Wednesday its revenue was at a record
high of RM603.29mil, up 12.6% from RM535.36mil a year ago. Earnings per
share were 8.7 sen compared with 4.14 sen.
It declared a first
single tier interim dividend of 7.0 sen per share (net of tax) for the
quarter, which would be paid on July 19.
Top Glove said its
nine-month earnings rose 59.3% to RM138.69mil from RM87.05mil in the
previous corresponding period. Revenue increased 12.9% to RM1.707bil
from RM1.512bil.
"The improved performance was attributed to an
increase in demand, improved efficiency, coupled with a favourable
downtrend in natural rubber latex prices which declined from an average
of RM8.80 per kg in the nine-months of FY11 to RM7.56 a kg in the
nine-months of FY12," it said.
Top Glove group chairman Tan Sri Lim Wee Chai
said the better performance was due to stronger demand for gloves
especially from all the markets, as gloves are deemed as basic
necessities, especially in the healthcare industry.
"The
positive growth can be traced to several important trends: government
and employers putting more emphasis on workplace safety, a growth in
safety compliance regulations, and the ongoing education and awareness
to promote public health and safety benefits of hand protection," he
said.

Result

9MFY2012 net earnings above our and market expectation by accounting to 91% and 83.3% of our and consensus forecast mainly due to better operating margin pursuant to lower than estimated latex price. Meanwhile, turnover was well within expectations, meeting 75.1% of our full year estimate and 76.5% of the street’s.
Top Glove recorded RM603.3m revenue and RM53.8m of net profit in 3QFY2012. This brought the 9MFY2012 revenue and net profit to RM1707.1m and RM138.7m respectively. Topline increased by 12.9% yoy while bottomline was 59.2% higher yoy.

Comment

Well poised for recovery – Top Glove looked to have put the slump last year behind them after yet another consistent performance in this quarter. The higher sales volume was the reason behind the impressive results, as both developed and emerging markets posted strong demand for gloves. As a result, revenue rose to a record high of RM603.3m in this quarter, 9.9% higher qoq and 12.7% higher yoy. Similarly, the net profit soared to RM53.8m, significantly up 110.2% yoy.
Positive macro factors - 9MFY2012 operating margin stood at 10.2%, up from 7.2% yoy. The improved margin was mainly attributable to the lower latex price, which is 15.5% lower yoy (from RM8.85/kg to RM7.48/kg). During the same period, USD strengthened to RM3.11/USD from RM3.09 in 9MFY2011. We believe that the cheaper raw material price and favourable forex would continue to boost Top Glove’s earnings, and expect better 4QFY12 result to conclude a prefect year for the Group considering the current downtrend of latex price. (RM6.57/kg as of 14 June 2012)
Fairly muted impact of minimum wage policy – Top Glove is beefing up its automation technology in order to mitigate the impact of minimum wage which comes into effect on 1 January 2013. The upgrade is set to reduce 20% of its human labour per factory and management guided 80% of its production line will be automated in 6 months time. We view the move positively as it will further enhance efficiency and productivity of the production lines.
Interim dividend of 7 sen per share – Top Glove has declared an interim net dividend of 7 sen per share.

Earnings Outlook/Revision

We revised upward our earnings forecast for FY2012-FY2014 by 10-22% as the latex price is approaching its all time low of RM6.3/kg in 2012 amid the slower economic growth of China, being the largest consumer of rubber, and the thorny debt crisis in Europe.

Valuation & Recommendation

Upgrade to BUY from HOLD with a higher Target Price of RM5.57 – We peg our TP at 16x FY2013 PER, which is in line with its 5-year average PE. We deem the weakened global demand of rubber to benefit Top Glove most as it is the largest rubber glove manufacturer in the world. The convincing result in the past quarters suggests that the Group is well on track to its glorious days.