Hot Stock Top Glove falls 8.3% on weak 2Q results, downgrades

Hot Stock Top Glove falls 8.3% on weak 2Q results, downgrades
Business & Markets 2014
Written by Jeffrey Tan of theedgemalaysia.com
Friday, 21 March 2014 11:50

KUALA LUMPUR (Mar 21): Top Glove Corporation Bhd fell as much as 8.3% after releasing its second quarter financial results, which was hurt by the sharp decline in average selling prices (ASPs) for its glove products and losses in China operation and foreign exchange management.

The stock suffered downgrades in earnings and target prices today.

The world’s largest glove manufacturer yesterday announced weaker-than-expected 2Q FY14 results, with net profit and revenue coming in lower at RM41.5 million and RM548.3 million respectively.

At 11.22 am today, Top Glove lost 34 sen or 6.4% to RM4.94. The fourth top loser saw trades of some 12 million shares. It earlier hit a low of RM4.84. The stock had fallen by 25 sen or 4.5% yesterday.

Due to the ASP fall, analysts have slashed their earnings forecasts -- no thanks to Top Glove’s heavy reliance on latex-based glove products.

In a note, Affin Investment Bank Research said it has cut earnings per share (EPS) forecast for Top Glove's FY14 by 9% to 32.3 sen.

The research house also reduced its EPS forecasts for FY15 and FY16, by 13% to 34 sen and by 15% to 36.9 sen respectively.

Meanwhile, Kenanga Research has downgraded Top Glove's FY14E and FY15E net profit forecasts by 12% to 15%, taking into account lower margins in the latex segment which accounts for 70% of the product mix.

“Looking ahead, Top Glove is expected to face difficulty maintaining decent ASPs to defend its market share,” said the Kenanga research team.

“This is due to its product mix that is skewed towards the challenging latex-based gloves market.”

The research team pointed out losses from Top Glove’s China operations and foreign exchange losses also contributed to the glove manufacturer’s lacklustre performance.

Despite the pessimism on Top Glove’s earnings going forward, analysts have largely kept a ‘neutral’ or ‘hold’ rating on the stock at RM5.28.

Affin IB research analyst Mandy Teh said she has downgraded Top Glove to ‘reduce’ call and lowered target price (TP) to RM5.10.

But Kenanga Research has maintained its ‘market perform’ call on the glove manufacturer. However, the research house has reduced TP by 9.3% to RM5.58.

“Key catalyst to spur the stock would be on improvement in pricing structure and a faster-than-expected pace in the completion of refurbishment activities,” said Mandy Teh of Affin IB.

The Kenanga research team said: “Top Glove’s growth prospects going forward are expected to come from its capacity expansion.”

The capacity expansion, largely for nitrile, will see an additional 2.2 billion pieces of gloves or 5% growth to a total of 43.5 billion pieces of gloves by this year end.