Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Top Glove Corp Bhd
(June 20, RM5.19)
Downgrade to sell at RM5.26 with reduced target price RM4.18 (from RM5.14):Top Glove's cumulative 9MFY11 net profit of RM88.3 million fell below our and consensus expectations, accounting for 52.9% and 61.2% of full-year forecasts. Net profit shrank 56.5% year-on-year (y-o-y) owing to unfavourable latex prices and weakening US dollar against the ringgit.
As anticipated, sales volume declined 15% y-o-y in 3QFY11. Revenue eroded 3.7% y-o-y despite the 23% y-o-y higher average selling price (ASP) of US$32 (RM97.60) per thousand pieces. The demand shrinkage was primarily due to: (i) lower average utilisation rate of 63% (due to the commissioning of a new plant, F21 in Klang, in May); and (ii) customers holding minimum inventory in anticipation of a retreat in latex prices. The prevailing inventory holding period of one to two months is lower than the normal levels of circa three to four months. During the Influenza A (H1N1) outbreak, the holding period was even higher at four to six months.
Quarter-on-quarter sales volume, meanwhile, was up 10.3%, charting revenue of RM535.4 million. For 9MFY11, Top Glove's revenue declined 1.7% to RM1,512.1 million compared with the corresponding period last year.
Top Glove's net income tumbled 56.5% y-o-y to RM87.1 million for 9MFY11, dampened by higher input costs of RM1,412.7 million (10.3% y-o-y). Earnings before interest and tax (Ebit) margin was therefore squeezed by 10 percentage points to 7.3%. We believe the culprits were: (i) the elevated average latex price by 47.4% y-o-y (from RM6.26 per kg in 9MFY10 to RM9.24 per kg in 9MFY11); (ii) declining US dollar against ringgit by 8.8% (from RM3.36 in 9MFY10 to RM3.07 in 9MFY11); and (iii) lag effect in passing on the costs to customers.
Top Glove factory F21 in Klang, which has 16 additional lines, was commissioned in May. In addition, three other factories are slated to be completed by end-FY11 and FY12. We are revising upwards our glove capacity from six billion to 6.3 billion pieces to better reflect the guidance given by management. Top Glove's total capacity of 35.25 billion gloves per year will be increased to 41.6 billion pieces.
The first single-tier interim dividend of five sen (net) per share was declared for the quarter, payable on July 21.
We trim our earnings forecast by 20.6% (from RM166.9 million to RM132.5 million) for FY11 and 16.9% (from RM222.2 million to RM184.6 million) for FY12. The cuts are basically to reflect the rise in latex prices as well as the depreciation in US dollar. Any further adjustments on the numbers are pending our meeting with management during the analysts briefing this Thursday.
We expect sales volumes in 4QFY11 to grow but remain cautious due to the high volatility of latex prices coupled with risks of further deterioration in rubber glove demand. Therefore, we downgrade our recommendation to 'sell' with a lower target price of RM4.18 per share. We ascribe a full-year price-earnings ratio of 14 times, Top Glove's average three-year forward PER band. ' MIDF Research, June 20
This article appeared in The Edge Financial Daily, June 21, 2011.
Company Name: TOP GLOVE CORPORATION BHD
| Research House: MIDF | Price Call: SELL | Target Price: 4.18 |
Top Glove Corp Bhd
(June 20, RM5.19)
Downgrade to sell at RM5.26 with reduced target price RM4.18 (from RM5.14):Top Glove's cumulative 9MFY11 net profit of RM88.3 million fell below our and consensus expectations, accounting for 52.9% and 61.2% of full-year forecasts. Net profit shrank 56.5% year-on-year (y-o-y) owing to unfavourable latex prices and weakening US dollar against the ringgit.
As anticipated, sales volume declined 15% y-o-y in 3QFY11. Revenue eroded 3.7% y-o-y despite the 23% y-o-y higher average selling price (ASP) of US$32 (RM97.60) per thousand pieces. The demand shrinkage was primarily due to: (i) lower average utilisation rate of 63% (due to the commissioning of a new plant, F21 in Klang, in May); and (ii) customers holding minimum inventory in anticipation of a retreat in latex prices. The prevailing inventory holding period of one to two months is lower than the normal levels of circa three to four months. During the Influenza A (H1N1) outbreak, the holding period was even higher at four to six months.
Quarter-on-quarter sales volume, meanwhile, was up 10.3%, charting revenue of RM535.4 million. For 9MFY11, Top Glove's revenue declined 1.7% to RM1,512.1 million compared with the corresponding period last year.
Top Glove's net income tumbled 56.5% y-o-y to RM87.1 million for 9MFY11, dampened by higher input costs of RM1,412.7 million (10.3% y-o-y). Earnings before interest and tax (Ebit) margin was therefore squeezed by 10 percentage points to 7.3%. We believe the culprits were: (i) the elevated average latex price by 47.4% y-o-y (from RM6.26 per kg in 9MFY10 to RM9.24 per kg in 9MFY11); (ii) declining US dollar against ringgit by 8.8% (from RM3.36 in 9MFY10 to RM3.07 in 9MFY11); and (iii) lag effect in passing on the costs to customers.
Top Glove factory F21 in Klang, which has 16 additional lines, was commissioned in May. In addition, three other factories are slated to be completed by end-FY11 and FY12. We are revising upwards our glove capacity from six billion to 6.3 billion pieces to better reflect the guidance given by management. Top Glove's total capacity of 35.25 billion gloves per year will be increased to 41.6 billion pieces.
The first single-tier interim dividend of five sen (net) per share was declared for the quarter, payable on July 21.
We trim our earnings forecast by 20.6% (from RM166.9 million to RM132.5 million) for FY11 and 16.9% (from RM222.2 million to RM184.6 million) for FY12. The cuts are basically to reflect the rise in latex prices as well as the depreciation in US dollar. Any further adjustments on the numbers are pending our meeting with management during the analysts briefing this Thursday.
We expect sales volumes in 4QFY11 to grow but remain cautious due to the high volatility of latex prices coupled with risks of further deterioration in rubber glove demand. Therefore, we downgrade our recommendation to 'sell' with a lower target price of RM4.18 per share. We ascribe a full-year price-earnings ratio of 14 times, Top Glove's average three-year forward PER band. ' MIDF Research, June 20
This article appeared in The Edge Financial Daily, June 21, 2011.
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