Top Glove Corp Bhd
(Dec 12, RM4.43)
Maintain sell with target price RM3.40: Net profit for 1QFY12 is likely to undershoot market expectations but is in line with ours. We think the recent share price strength (+8% in two months) is sentiment driven on positive leading indicators (falling latex cost, stronger US dollar).
However, we caution that overcapacity in the latex powdered segment (53% of product mix) will limit earnings recovery and there is now downside risk to the street’s earnings estimates. Our RM3.40 discounted cash-flow-derived (DCF) target price (TP) implies 12 times CY13 price-earnings ratio (PER).
The results are due for release on Friday. We expect Top Glove to post net profit of around RM30 million (+15% quarter-on-quarter [q-o-q], -17% year-on-year [y-o-y]). Stronger sequential earnings are likely to be driven by margin recovery of +1.5-percentage points (ppt) q-o-q to earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 11% (-1ppt y-o-y) on lower latex cost (-13% q-o-q) and stronger greenback (+5% q-o-q).
Sales volume remained uninspiring with a minimal pick-up of 2% to 3% q-o-q despite new capacity and much lower latex cost, which implies severe overcapacity in the latex powdered segment (70% plant utilisation against 100% for latex powder free (PF) and nitrile).
The margin premium for nitrile gloves (against latex) has narrowed to 4ppt (from 5ppt to 10ppt in FY11). This is a result of improved margin for latex gloves (on lower latex cost) while nitrile’s margin has came off due to new competition.
We believe the margin superiority of nitrile gloves will stay as:
(i) further downside to latex cost is limited given the intervention of the tripartite rubber producing countries (accounting for 70% of world supply); and
(ii) no significant overcapacity in the nitrile segment given that plants are running at full capacity and new nitrile lines are cautiously delayed.
We maintain our 20% to 22% earnings per share (EPS) growth forecasts for FY12/FY13, underpinned largely by improved margins in the latex segment. The stock currently trades at 16 times CY13 PER, above its mean of 13 times and a premium to the sector average of only eight times. Maintain “sell”. — Maybank IB Research, Dec 12
(Dec 12, RM4.43)
Maintain sell with target price RM3.40: Net profit for 1QFY12 is likely to undershoot market expectations but is in line with ours. We think the recent share price strength (+8% in two months) is sentiment driven on positive leading indicators (falling latex cost, stronger US dollar).
However, we caution that overcapacity in the latex powdered segment (53% of product mix) will limit earnings recovery and there is now downside risk to the street’s earnings estimates. Our RM3.40 discounted cash-flow-derived (DCF) target price (TP) implies 12 times CY13 price-earnings ratio (PER).
The results are due for release on Friday. We expect Top Glove to post net profit of around RM30 million (+15% quarter-on-quarter [q-o-q], -17% year-on-year [y-o-y]). Stronger sequential earnings are likely to be driven by margin recovery of +1.5-percentage points (ppt) q-o-q to earnings before interest, tax, depreciation and amortisation (Ebitda) margin of 11% (-1ppt y-o-y) on lower latex cost (-13% q-o-q) and stronger greenback (+5% q-o-q).
Sales volume remained uninspiring with a minimal pick-up of 2% to 3% q-o-q despite new capacity and much lower latex cost, which implies severe overcapacity in the latex powdered segment (70% plant utilisation against 100% for latex powder free (PF) and nitrile).
The margin premium for nitrile gloves (against latex) has narrowed to 4ppt (from 5ppt to 10ppt in FY11). This is a result of improved margin for latex gloves (on lower latex cost) while nitrile’s margin has came off due to new competition.
We believe the margin superiority of nitrile gloves will stay as:
(i) further downside to latex cost is limited given the intervention of the tripartite rubber producing countries (accounting for 70% of world supply); and
(ii) no significant overcapacity in the nitrile segment given that plants are running at full capacity and new nitrile lines are cautiously delayed.
We maintain our 20% to 22% earnings per share (EPS) growth forecasts for FY12/FY13, underpinned largely by improved margins in the latex segment. The stock currently trades at 16 times CY13 PER, above its mean of 13 times and a premium to the sector average of only eight times. Maintain “sell”. — Maybank IB Research, Dec 12
