Top Glove Corp Bhd
(Oct 15, RM4.74)
Maintain buy with target price (TP) of RM5.70: Top Glove’s full year FY14 net profit of RM180.1 million came in within our and consensus expectations, making up 97.2% and 96.5% of full year forecasts respectively.

The sales growth was driven by increase in volume. Top Glove’s revenue in 4QFY14 increased by +5.8% year-on-year (y-o-y), mainly driven by better growth in total sales volume. However, the growth was partially offset by low average selling prices of its gloves. This has resulted in its profits after tax and minority interest (Patami) to decline by -5.2% y-o-y. Overall results for FY14 were also slightly depressed as revenue and earnings fell by -1.6% y-o-y and -8.3% y-o-y respectively. For FY14, The group’s sales volume increased by +3%.

Lower earnings was attributed to weaker raw material price. Raw material prices continue to trend downwards compared with FY13. In FY14, price of natural latex fell by -17.3% y-o-y to an average of RM4.77 per kg. Meanwhile, price of nitrile latex contracted by -8.3% y-o-y to an average of RM3.51 per kg. The lower raw material prices have resulted in the average selling prices of gloves to decline in tandem as Top Glove’s customers demanded for lower prices.

Hence, the positive impact from the lower raw material price was minimal in light of the competitive environment which compelled any cost savings gained to be passed on to the customers.

On a positive note, the group’s nitrile gloves contribution to total sales volume expanded to 24% in FY14 compared to 20% in FY13. This is attributable to more demand from the developed markets such as the US, the UK, and Germany. Its market share in Asia has also expanded to 16%.

Top Glove’s operations in China have moved above the breakeven level and recorded earnings of RM1.4 million in 4QFY14. An additional six nitrile glove production lines at F27 came on-stream in Sept 2014, increasing total capacity from 42 billion pieces per year to 42.6 billion pieces per year.

Meanwhile, the group’s F29’s installation of production lines is expected to be completed and operational in Jan 2015. Besides F27 and F29, Top Glove is planning to add another two factories, Factory 30 and 31, which are expected to start production by mid-2015. This will increase capacity by an additional 3.2 billion pieces annually.

We maintain our “buy” recommendation on the stock with a TP of RM5.70 per share. Our valuation is based on price-earnings-ratio (PER) of FY15 of 16.1 times the earnings per share for FY15 of 35.4 sen. Our target multiple is equivalent to the rolling four-quarter historical PER of the company. — MIDF Research, Oct 15

This article first appeared in The Edge Financial Daily, on October 16, 2014.