Top Glove’s earnings to pick up in 2H of FY14

by **Cals** Fri 14 Mar 2014, 11:03

Business & Markets 2014

Written by Hwang DBS Vickers Research

Friday, 14 March 2014 10:38

Top Glove Corp Bhd
(March 13, RM5.70)
Maintain buy with target price of RM6.80: Our RM6.80 target price is pegged to 18 times calendar year 2014 (CY14) earnings per share (EPS). Top Glove is currently trading at only 15 times CY14 EPS versus Kossan Rubber Industries Bhd’s 16 times and Hartalega Holdings Bhd’s 18 times.

The 12% and 17% earnings growth for financial year 2014 ending Aug 31 (FY14) and FY15F will be driven by continued expansion of its nitrile gloves capacity, and increasing demand in emerging markets riding on higher healthcare spending and hygiene awareness.

Top Glove’s lacklustre six-month share price performance (-4% versus Hartalega’s -1% and Kossan’s +39%) has priced in expectations of weaker earnings.

We trimmed FY14 and FY15F net profit by 7% and 2% given the anticipated softer earnings for the second quarter (2QFY14).

However, this weakness is temporary as we expect earnings to pick up in the second half driven by improving utilisation rates as Top Glove continues to tap into the emerging markets. Margin expansion from nitrile gloves should further lift earnings.

Average capacity utilisation continues to hover at 70% for latex gloves and 90% for nitrile gloves. We expect 2QFY14 margins to be dampened by lower average selling prices as Top Glove passes on cost savings from lower raw material prices to consumers to optimise capacity utilisation. Average latex prices have fallen 7% quarter-on-quarter to a low of RM4.98 per kg.

We do not expect dividends in 2QFY14, but we anticipate an interim dividend to be declared in 3QFY14 to meet its 50% target payout for the year. — Hwang DBS Vickers Research, March 13

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This article first appeared in The Edge Financial Daily, on March 14, 2014.
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