Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: OSK
Top Glove Corporation Bhd
(Jan 12, RM5.27)
Maintain 'neutral' at RM5.38 with target price of RM5.74: Management believes that the unrelenting rise in latex price was due to adverse weather conditions, which have resulted in low latex production in rubber trees, rather than due to speculation as some of its peers believe. We believe, however, that both factors have been at play as there was flooding in southern Thailand as well as speculative trading of the commodity since the price has not come down since 2H09.
This increase was at the expense of powdered latex and vinyl gloves. Nevertheless, powdered latex gloves still contributes the major share of about 52% to Top Glove's total products, followed by powder-free latex gloves at 30% and nitrile gloves at 10% currently. The remaining 8% is contributed by vinyl and surgical gloves.
Going forward, the management expects to increase its nitrile mix to 15%-20% since more customers prefer these types of gloves as they are currently cheaper than natural rubber gloves by about 10%-20% with nitrile latex price now lower than that of natural rubber latex. We are positive on the management's move to increase its nitrile mix but are still unsure how fast it can make the switch, given that nitrile gloves are mainly sold to established healthcare multi-national corporations which have fixed orders from their existing suppliers.
Hence, unless Top Glove is targeting its existing customers, it may not be so easy to penetrate new markets or garner new customers since this type of glove is used for medical purpose, which is required to meet high Food and Drug Administration (FDA) requirements.
Top Glove will invest about RM160 million for 8,000 hectares of land, planting and facilities for a concession period of 70 years in Cambodia. It will then start planting rubber trees and expects to tap them in six to seven years' time. The plantation is expected to contribute about 15% of the company's latex requirement.
Although we are positive on this move since it would act as a hedging mechanism, its contribution to Top Glove's total requirement may be insufficient. The management will buy more land once this move turns out to be a success.
Our target price for the company remains unchanged at RM5.74, based on a PER of 15 times FY12 EPS. ' OSK Investment Research, Jan 12
This article appeared in The Edge Financial Daily, January 13, 2011.
Company Name: TOP GLOVE CORPORATION BHD
Research House: OSK
Top Glove Corporation Bhd
(Jan 12, RM5.27)
Maintain 'neutral' at RM5.38 with target price of RM5.74: Management believes that the unrelenting rise in latex price was due to adverse weather conditions, which have resulted in low latex production in rubber trees, rather than due to speculation as some of its peers believe. We believe, however, that both factors have been at play as there was flooding in southern Thailand as well as speculative trading of the commodity since the price has not come down since 2H09.
This increase was at the expense of powdered latex and vinyl gloves. Nevertheless, powdered latex gloves still contributes the major share of about 52% to Top Glove's total products, followed by powder-free latex gloves at 30% and nitrile gloves at 10% currently. The remaining 8% is contributed by vinyl and surgical gloves.
Going forward, the management expects to increase its nitrile mix to 15%-20% since more customers prefer these types of gloves as they are currently cheaper than natural rubber gloves by about 10%-20% with nitrile latex price now lower than that of natural rubber latex. We are positive on the management's move to increase its nitrile mix but are still unsure how fast it can make the switch, given that nitrile gloves are mainly sold to established healthcare multi-national corporations which have fixed orders from their existing suppliers.
Hence, unless Top Glove is targeting its existing customers, it may not be so easy to penetrate new markets or garner new customers since this type of glove is used for medical purpose, which is required to meet high Food and Drug Administration (FDA) requirements.
Top Glove will invest about RM160 million for 8,000 hectares of land, planting and facilities for a concession period of 70 years in Cambodia. It will then start planting rubber trees and expects to tap them in six to seven years' time. The plantation is expected to contribute about 15% of the company's latex requirement.
Although we are positive on this move since it would act as a hedging mechanism, its contribution to Top Glove's total requirement may be insufficient. The management will buy more land once this move turns out to be a success.
Our target price for the company remains unchanged at RM5.74, based on a PER of 15 times FY12 EPS. ' OSK Investment Research, Jan 12
This article appeared in The Edge Financial Daily, January 13, 2011.
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