By Maybank IB Research
24 Apr 2012
Upgrade to Buy. We have turned positive on Top Glove: (i) its sales
has picked up further and is almost back to its H1N1 peak; and (ii) latex
cost (key input) has begun its seasonal downtrend and is likely to
sustain at lower levels due to global rubber supply surplus this year.
We raise our FY12-14 EPS forecasts by 8-12% on lower latex cost
assumption. Post-revision, Top Glove trades at 13x CY13 PER, below
its 5-year average of 16x. We upgrade the stock to Buy (from Sell), with
a higher TP of MYR5.40 (+29%) on 16x PER target (previously 14x). Its
share price has fallen by 15% from its peak in Jan 2012.
Sales almost back to H1N1 peak. 2QFY12 (Dec-Feb) sales volume
(est. 6.4b pcs) was inching close to its H1N1 peak (est. 6.7b pcs)
during 1HFY10, and continues to rise. Sales volume recovery after 2
years stems from: (i) a resumption in buying activity from Brazil after
running down its overly high inventories in 2011 (Brazil overbought its
glove requirements during the H1N1 period in 2010); (ii) Top Glove has
been adding nitrile capacity to compensate for the ASP-led latex
market share loss. Nitrile sales is now 2x YoY higher and accounts for
14% of total sales volume (2011: 11%).
Latex price coming off, likely to sustain at lower levels. In Apr
2012, latex price exhibited the first post-wintering weakness, retreating
5% MoM to MYR7.40/kg. Though it has reached the floor price set by
the Thai government (at MYR7.40/kg), we believe latex price will
undershoot the floor price as supporting the commodity price amid a
prolonged global rubber supply surplus is uneconomical. The
International Rubber Study Group (IRSG) is projecting a rubber supply
surplus of 81k tonnes in 2012 (from a deficit of 159k tonnes in 2011).
Firm recovery in FY12. With majority of its sales in the latex segment
(74% of total sales), a surplus-led lower latex cost will help Top Glove
to at least sustain its margins. We lower our latex cost assumption by
7%, resulting in an 8-12% upward revision to our FY12-14 EPS
forecasts. We now look to a sharp 64% YoY net profit recovery in FY12
to MYR185m, higher than its pre-H1N1 net profit of MYR169m in FY09.
Sales volume on an upward trajectory again
Brazil to support volume recovery. Top Glove’s sales volume has
picked up again since 2QFY11 (+5% QoQ) and we expect its sales to
continue its upward trajectory trend. We note that orders from the Brazil
glove distributors have just, in Feb 2012, reverted to the H1N1 level
after running down their glove inventories in 2011. Brazil now accounts
for 15% of Top Glove’s total sales volume, compared to 10% in 2011.
New nitrile lines to capture nitrile growth. The demand switch to
nitrile glove was prevalent in 2011, which saw Top Glove’s latex glove
export volume falling 25% YoY while nitrile grew 28% YoY. Hence, the
company has been predominantly adding new nitrile capacity to tackle
the demand switch. Over the past 1 year, Top Glove slowly added
around 3b pcs of nitrile capacity (7% of total capacity) and nitrile glove
now accounts for 14% of its total sales volume (FY11: 11%).
Expect overall sales to continue rising. All in, we think Top Glove’s
overall glove sales volume will continue to rise given: (i) more nitrile
capacity scheduled to come online to cater for the greater nitrile
demand; and (ii) organic growth for latex powdered glove from the
emerging markets, albeit slow. We project 25.3b pcs sales volume in
FY12 (unchanged) and Top Glove has sold est. 12b pcs in 1HFY12.
We thus expect 10% HoH sales volume increase in 2HFY12.
Latex price outlook turning favourable again
Latex price ready to dip again. In Apr 2012, latex price exhibited the
first post-wintering weakness, retreating by 5% MoM to MYR7.40/kg.
The rise in latex price during wintering period this year is also less
sharp than 2011, signifying more balanced demand-supply
fundamentals. Additionally, latex price 2012-YTD is also substantially
26% lower YoY.
And, to potentially undershoot floor price. Though the Thai
government has set the latex floor price at MYR7.40/kg (similar to the
current spot price), we think it is very likely that the latex price will
undershoot the floor price. We believe supporting the commodity price
amid a prolonged global rubber supply surplus is uneconomical.
Global rubber supply turning surplus. Latex price recorded a peak
of MYR11/kg in 2011 due to the supply tightness. However, in view of
the rising supply (new trees planted in 2005 are ready for tapping), the
International Rubber Study Group (IRSG) is projecting global rubber
supply to turn a surplus of 81k tonnes in 2012 (from a deficit of 159k
tonnes in 2011). This is a new projection by the IRSG that was
released in Feb 2012.
Stable margins on lower latex cost. Although current input cost
favors the nitrile glove sales (NBR cost at 9% discount to latex), a lower
and more stable NR latex cost will help Top Glove to sustain its
margins. However, management reckons that the glove distributors still
have the upper hands in latex powdered ASP negotiations as the
utilization of Top Glove’s latex powdered lines of 70% is still below its
ideal utilization of 80%.
Earnings outlook
Earnings upgrade of 8-12% in FY12-14. In view of the global rubber
supply surplus, we have revised our latex cost assumption lower by 7%
resulting in 8-12% upward revision to our FY12-14 EPS forecasts. We
have not imputed for any minimum wage hikes in our model. Top Glove
has around 5,500 unskilled workers being paid c.MYR600/month,
below the government’s proposed minimum wage of MYR800-1,000.
Nevertheless, the company is in the midst of installing more robotic
arms at its nitrile plants to reduce its labour requirement.
Expect stronger 4QFY12. We expect its 3QFY12 core earnings to be
flattish QoQ (2QFY12: MYR38m) on marginally higher sales and stable
margins as wintering season-led latex cost increase this year is
relatively mild. However, 4QFY12 earnings could be driven by lower
latex cost. In 1HFY12, company reported a core net profit of MYR85m
(+37% YoY), against our revised full-year FY12 net profit forecast of
MYR185m, indicating our expectation of 18% HoH earnings growth.
A sharp recovery year in FY12. We now project its earnings to grow
64% YoY in FY12 on sales volume and margins recovery, coming from
a low base in FY11 (due to the collapse of H1N1-fuelled demand and
overcapacity in latex powdered segment). Our projected FY12 net profit
of MYR185m is still below its high of MYR245m in 2010 but above its
pre-H1N1 net profit of MYR169m in FY09.
Modest growth in FY13-14. For FY13-14, we project a high single digit
EPS growth of 9% p.a., derived from sales volume growth of 7% p.a..
While our FY13-14 forecasts have not imputed for YoY margins
recovery, this could be off-set by an anticipated minimum wage
implementation by as early as May this year. Overcapacity at the latex
powdered segment should be absorbed in FY13-14 on rising, albeit,
slow organic growth from the emerging markets and this should lift its
margins further.
Valuations: Back to mean. Our new target PER of 16x pegs the stock
back to its mean valuations as we believe sentiment towards the stock
has turned positive on long-term global rubber supply surplus outlook.
Share price: MYR4.43
Target price: MYR5.40
[Source]
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