Top Glove’s FY14F-FY16F earnings growth to be subdued, says AmResearch

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KUALA LUMPUR (Oct 2): AmResearch has maintained its Hold rating on Top Glove Corporation Bhd at RM4.91 with an unchanged fair value of RM4.80 and said it expects Top Glove’s FY14F-FY16F earnings growth to be subdued as demand for its products remains lacklustre and as margin pressure weighs.

In a note Thursday, the research house said Top Glove’s sales volume was likely to rise at a lower rate (vis-à-vis the global demand growth of 8%-10% per annum) in the near term, dragged by its unfavourable product mix.

It said latex gloves presently make up 68% of the Top Glove’s total product mix while nitrile gloves constitute 24%.

“With its previously proven volume strategy no longer effective following the industry’s structural shift and its late entrance into the nitrile segment, we opine that the group had been compelled to compete on price to gain market share.

“Management, however, believes that the low average selling price is due to overcapacity in the segment,” it said.

AmResearch said Top Glove was holding back its expansion plans.

The research house said the glove maker was targeting to add only 2.6 billion pieces by end-FY15F to its current installed capacity of 42 billion pieces.

“The year-on-year growth in capacity of 1%-5% is lower than its previous years’ average of 10%.

“We note that Top Glove’s EBITDA margin has remained relatively flat at about 14% despite its ongoing expansion up the value chain into the nitrile segment.

“Management attributes this to cost pressure and stiff competition which limit its ability to pass on the cost increases,” it said.

At 9.26am, Top Glove added 1.02% or five sen to RM4.96 with 100 shares done.