Hurt by price discounting
Core net profit represented 97% of our full-year forecast, in line with expectations, but only 93% of consensus. Although sales volume was stronger yoy, lower ASP due to high competition weighed on its net profit. We believe this issue will persist.
Given intensifying competition and the proposed Medi-Flex privatisation, we cut our FY14-15 core net profit and introduced FY16 forecasts. Our target price, based on a higher 17.2x P/E (10% premium over our revised market P/E of 15.9x) vs. 17.5x previously and rolled over to CY15, is reduced. We remain Neutral as we still expect it to post stable earnings given the higher contribution from nitrile, which will compensate for weak natural rubber glove demand. We prefer Kossan.
Hit by lower ASP
Top Glove registered strong double-digit sales volume growth of 18% yoy due to robust demand for nitrile gloves, offsetting the weak natural rubber glove sales volume. Full-year revenue was, however, flat at RM2.3bn as selling prices fell due to lower raw material costs (latex prices declined 22% yoy; nitrile prices fell 28% yoy) and lower natural rubber glove prices. Top Glove lowered natural rubber glove prices to keep customers from switching to nitrile gloves. To some extent, we believe the group also had to lower the average selling price of nitrile gloves amid intense competition in the nitrile glove space. Despite the flat topline growth, EBITDA grew 4.1% yoy, partly due to forex gains of RM15.5m vs. a gain of RM4.3m last year.
Greater operating efficiency from new production lines and higher contribution from nitrile gloves also led to the jump in EBITDA. PBT, however, declined 1% due to higher depreciation cost and an associate loss from Icon Property. Given this, coupled with the higher effective tax rate in FY13, core net profit dropped 6.4% yoy.
We believe Top Glove will continue to experience pricing pressure as competition intensifies due to the influx of new capacities to the industry. The strong demand for nitrile gloves also does not augur well for Top Glove.
Proposal to privatise 79.77%-owned Medi-Flex
In a separate announcement, Top Glove said that its wholly-owned subsidiary, Top Glove Sdn Bhd (TGSB), has proposed to privatise its 79.77%-owned SGX-listed subsidiary, Medi-Flex Limited. This was unexpected as the management had been busy combating its declining natural rubber glove sales. Performance of this subsidiary was also not impressive prior to FY13. TGSB is extending an offer price of S$0.15 (RM0.38) per share, which represents a 15% premium over Medi-Flex’s last closing price of S$o.13. The offer price translates into an FY13 P/E of 14.5x, based on the subsidiary's FY13 net profit of RM24.7m. It will cost TGSB RM71m to acquire the remaining 20.2% stake that it does not own. TGSB will satisfy this using its internally-generated funds.
Briefly on Medi-Flex
Medi-Flex is a natural rubber and nitrile glove manufacturer. In its latest financial FY13 results, which were released last Friday, revenue increased 19% yoy while net profit jumped 134% yoy. The strong results were mainly due to capacity additions from new production lines, an increase in the sales of nitrile and cleanroom gloves as well as improved manufacturing efficiency. Nitrile and cleanroom gloves command a higher margin.
Privatisation of Medi-Flex enhances long-term earnings
Our post-results FY14-16 net profit forecasts are further reduced by 2-4% after consolidating the remaining 20% of Medi-Flex’s earnings and factoring in lower interest income. While the privatisation is earnings-dilutive in the near term, we are positive on this exercise as Medi-Flex should continue to grow strongly given its focus on manufacturing nitrile gloves. This will, in turn, boost Top Glove’s bottomline in the longer term.