Top Glove -
Target Price: MYR6.34
Trying Times In China
Top Glove (TOPG)’s 1QFY14 net profit of MYR50.3m came in largely in line with our and consensus expectations, making up 21.8% and 22.0% of FY14 estimates respectively. The global shift in demand towards nitrile gloves puts TOPG in a more challenging environment given that its capacity mix is skewed towards the NR glove segment (80:20). We reiterate our NEUTRAL call, with our FV unchanged at MYR6.34.
Largely in line. TOPG’s 1QFY14 net profit of MYR50.3m (flat sequentially but down 12.5% y-o-y) was broadly in line with our and consensus expectations, reaching 21.8% and 22.0% of the respective FY14 forecasts. The group’s 1QFY14 revenue of MYR573.9m (+4.7% qo-q; -1.8% y-o-y) remained relatively flat on lower average selling prices (ASPs) weighed by lower material costs. Despite a 10% increase in overall sales volume, 1QFY14 core earnings dipped 12.5% y-o-y, mainly due to lower ASPs amid pricing pressure in its NR glove division while its vinyl gloves division experienced an unfavourable operating environment in China, where losses widened to MYR5.2m (from MYR0.74m in the last quarter).
Nitrile expansion. Moving forward, TOPG’s annual production capacity will be lifted to 46bn pieces per annum by June 2014 (from 44bn pieces) ,boosted by its two new factories (F27 and F29). However, we gather that customers are still progressively switching to nitrile-based gloves from latex-based ones as the trend continues to favour the former, which in turn leads to pricing pressure in the NR glove division. As of end-Aug, TOPG’s product mix was still skewed towards NR gloves, at 80% NR and 20% nitrile.
Risks. Key risks would be: i) a spike in raw material prices, ii) a depreciation of the USD, and iii) price competition within the industry.
Maintain NEUTRAL. We maintain our NEUTRAL stance as we continue to see a challenging business environment for TOPG given pricing pressure in its NR glove segment, which will offset higher contribution from its nitrile gloves. Our MYR6.34 FV is pegged to an existing 17x FY14 EPS, which is in line with the mean of its 5-year historical trading band.
Publish date: 18/12/13