Top Glove: Maintain Buy - Make This Your Top Priority

By Maybank IB Research
11 June 2012


A conducive operating environment. Upcoming 3QFY8/12 results is likely to meet expectations. We expect Top Glove’s earnings growth momentum to sustain on the declining latex cost, stronger USD and
higher sales volume. Additionally, its current plant automation exercise will see the group largely unscathed by the minimum wage hikes. Valuation is still undemanding with forward PER of 14x, below its mean
of 16x. Maintain BUY and TP of MYR5.40 (16x CY13 PER).

3QFY8/12: Expect earnings growth.  3QFY8/12 results is due to release on 14th June. We expect sequentially stronger core net profit of around MYR40m (+6% QoQ) on higher sales volume (+5% QoQ) and stable margins. Glove ASPs was raised to pass on higher latex cost (+2% QoQ). However, there may be some substantial unrealized forex loss as the USD closed higher (+6% from end-Feb 2012).

Long-term low latex price outlook.  Latex price has fallen to MYR6.80/kg (-4% MoM) on seasonal normalization of the rubber trees’ yield. On a YoY basis, the YTD latex price has also dropped substantially by 25% on weak global demand outlook. Going forward, we expect latex price to persist at low levels given the long-term rising rubber supply surplus outlook.

Labour reduction drive. In response to the minimum wage hikes (wef Nov 2012 for Malaysia), Top Glove will improve the automation levels of all of its plants (installing auto-stripping/counting/stacking machines), over the next one year which will cost the group c.MYR80m. The financial benefits are: (i) reduction in the impact of wage hikes to total cost to 2% (from 4% without improvement on automation) as unskilled
workforce will reduce by 30%; (ii) increase in effective capacity by 20% on higher productivity of the lines and consequently (iii) building/capex for new plants could be deferred.

Beneficiary of a stronger USD. Almost all of Top Glove’s sales is in USD and majority of its cost is in MYR. Although Top Glove will pass on the savings to its customers, there  is currently a 2-month time-lag in
adjusting the glove ASP downward. We maintain our forecasts, looking at a firmed recovery in FY12 (+59% YoY) and 10-12% in FY13-14 p.a.


Share price: MYR4.60
Target price: MYR5.40 (unchanged)

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