Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: MAYBANK
Top Glove Corp Bhd
(March 30, RM5.30)
Maintain hold at RM5.28 with revised target price RM5.10 (from RM4.55): Latex cost has rebounded to the pre-Japan earthquake level of RM10.35 per kg. We reduce our FY11 earnings per share (EPS) forecast by 8% after we trim our sales volume assumption by 3%. Though Top Glove is trading at 15 times CY12 price-earnings ratio [PER] (above its five-year historical average of 13 times), we think short-term interest in the stock will sustain owing to expectations of falling latex costs in May.
We reiterate our 'hold' call and adjust our target price upwards to RM5.10 (from RM4.55) as we roll forward our discounted cash flow valuation.
The tumble in latex cost (-14% on the fourth day after the March 11 quake) proved to be a knee-jerk reaction to the catastrophe'' in Japan. Latex cost has rebounded strongly by 21% to RM10.35 per kg (from the earthquake low), slightly above the pre-earthquake level.
In our view, the rebound was due to: (i) Japan accounting for only 7% of global latex demand; (ii) latex supply is still in a deficit position on current low production season; and (iii) major producers' definitive actions in shoring up prices ' the Thai government has set a floor rate for rubber sheet (rubber in its original form, before processing to latex) at 120 baht (RM12) per kg.
At the current latex cost level, Top Glove's glove pricing quotation remains unfavourable to latex gloves (circa 80% of sales volume), relative to nitrile. Low-quality powdered latex glove is quoted at US$35 (RM106) per 1,000 pieces (on par to nitrile glove) and PF latex is at a 13% premium to nitrile.
We understand that the company did not see any sales recovery when latex cost tumbled as distributors were hoping for much lower latex prices. Though we expect orders to pick up strongly after May (post 'wintering' season), our previous assumption for sales volume to rebound 30% half-on-half in 2HFY11 was too bullish. We reduce our FY11 sales volume forecast by 3% leading to an 8% downgrade to FY11 EPS.
We make no change to our FY12/13 numbers. We maintain our 'hold' rating on Top Glove and adjust our target price (TP) upward to RM5.10 (from RM4.55) as we roll forward our discounted cash flow valuation. Our new TP implies 18.2 times CY11 PER valuations, close to its 18.7 times, one standard deviation above its historical mean. ' Maybank IB Research, March 30
This article appeared in The Edge Financial Daily, March 31, 2011.
Company Name: TOP GLOVE CORPORATION BHD
Research House: MAYBANK
Top Glove Corp Bhd
(March 30, RM5.30)
Maintain hold at RM5.28 with revised target price RM5.10 (from RM4.55): Latex cost has rebounded to the pre-Japan earthquake level of RM10.35 per kg. We reduce our FY11 earnings per share (EPS) forecast by 8% after we trim our sales volume assumption by 3%. Though Top Glove is trading at 15 times CY12 price-earnings ratio [PER] (above its five-year historical average of 13 times), we think short-term interest in the stock will sustain owing to expectations of falling latex costs in May.
We reiterate our 'hold' call and adjust our target price upwards to RM5.10 (from RM4.55) as we roll forward our discounted cash flow valuation.
The tumble in latex cost (-14% on the fourth day after the March 11 quake) proved to be a knee-jerk reaction to the catastrophe'' in Japan. Latex cost has rebounded strongly by 21% to RM10.35 per kg (from the earthquake low), slightly above the pre-earthquake level.
In our view, the rebound was due to: (i) Japan accounting for only 7% of global latex demand; (ii) latex supply is still in a deficit position on current low production season; and (iii) major producers' definitive actions in shoring up prices ' the Thai government has set a floor rate for rubber sheet (rubber in its original form, before processing to latex) at 120 baht (RM12) per kg.
At the current latex cost level, Top Glove's glove pricing quotation remains unfavourable to latex gloves (circa 80% of sales volume), relative to nitrile. Low-quality powdered latex glove is quoted at US$35 (RM106) per 1,000 pieces (on par to nitrile glove) and PF latex is at a 13% premium to nitrile.
We understand that the company did not see any sales recovery when latex cost tumbled as distributors were hoping for much lower latex prices. Though we expect orders to pick up strongly after May (post 'wintering' season), our previous assumption for sales volume to rebound 30% half-on-half in 2HFY11 was too bullish. We reduce our FY11 sales volume forecast by 3% leading to an 8% downgrade to FY11 EPS.
We make no change to our FY12/13 numbers. We maintain our 'hold' rating on Top Glove and adjust our target price (TP) upward to RM5.10 (from RM4.55) as we roll forward our discounted cash flow valuation. Our new TP implies 18.2 times CY11 PER valuations, close to its 18.7 times, one standard deviation above its historical mean. ' Maybank IB Research, March 30
This article appeared in The Edge Financial Daily, March 31, 2011.
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