Top Glove Corp Bhd
Sept 2 (RM7.87)
We are keeping our buy rating for Top Glove with a higher target price (TP) of RM9.15 from RM6.95, after imputing a stronger US dollar: Valuation is cheaper than peers like Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, despite being in a better position to retain the gains from a stronger US dollar. 

There is scope for higher dividends, given its rising cash pile. Earnings could also surprise on the upside.

Nitrile gloves demand will outpace natural rubber gloves demand, but the latter has better supply-demand dynamics, given the modest incoming supply. 

Thus, natural rubber glove makers will be better placed to capture currency gains, as nitrile glove makers will likely compete away the currency gains because of the need to deploy new capacities. 

Top Glove has the largest exposure to natural rubber gloves among peers (more than 60% of its sales mix).

We forecast earnings before interest and tax per thousand (Ebit/k) gloves will increase by 46% year-on-year (y-o-y) to RM10.28 in financial year 2015 forecast (FY15F), backed by the stronger US dollar and productivity gains. 

Thereafter, we expect Ebit/k gloves to grow by 5% and 0% in FY16F and FY17F. There is potential for earnings upside if Top Glove continues to register last quarter’s profitability (RM11.17 Ebit/k gloves).

Better earnings outlook and it is in the investor’s interest to rerate the stock. The share price should be rerated towards our RM9.15 TP as the market realises Top Glove as a cheaper play on the currency tailwind. 

Competition is heating up in the glove sector with several glove makers expanding aggressively. However, Top Glove should be more resilient as its core natural rubber glove segment could see relatively less competition than nitrile gloves. — Alliance DBS Research, Sept 2

This article first appeared in digitaledge Daily, on September 3, 2015.