Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Top Glove Corp Bhd
(Aug 15, RM5.25)
Maintain underperform at RM5.25 with revised fair value of RM4.23 (from RM4.70): Latex prices have corrected sharply, in tandem with other commodity prices (excluding precious metals) amid concerns of weaker than expected economic growth. As such, we have reduced our latex price assumption to RM8.59 per kg for FY11 (from RM8.69 earlier). Our latex price assumptions of RM7.75 to RM7.90 per kg for FY12/FY13 remain intact.
However, management said sales to Brazil (account for 12% to 13% of total sales) had slowed, caused by the overstocking of gloves by domestic distributors there during the 2009 Influenza A H1N1 outbreak. We believe the recent correction in latex and selling prices may prompt domestic distributors there to increase their inventory levels. Demand for gloves from Top Glove's other markets remain resilient given that there was no overstocking situation earlier, according to management.
With the risk of a double dip recession rising in the United States amid the weakening of the global economic recovery, we expect a stronger ringgit to US dollar rate of RM2.80 to RM2.90 for FY12/FY13 (against RM3.02 currently). The stronger ringgit would adversely impact earnings given that the bulk of Top Glove's sales are denominated in US dollars.
Despite the current demand-supply conditions, management said its capacity expansion plans are on track for Top Glove to increase its total capacity by 6.3 billion pieces per year to 41.55 billion gloves by March 2012. Upon completion of the three new plants, management estimates that Top Glove will attain a global market share of 27%.
The risks include: (i) lower raw material prices (latex and nitrile), which may result in margin expansion; (ii) depreciation of ringgit against the US dollar; and (iii) stronger than expected results from overseas operations.
We have revised down our FY11/FY12/FY13 earnings forecasts by 7.4%/7.6%/14.1% after adjusting for capacity utilisation, average selling prices, US dollar to ringgit rate and raw material price assumptions.
Coupled with the earnings revisions, our fair value is reduced to RM4.23 from RM4.70 based on an unchanged target CY12 price-earnings ratio of 14 times. We make no change to our 'underperform' call. ' RHB Research, Aug 15
This article appeared in The Edge Financial Daily, August 16, 2011.
Company Name: TOP GLOVE CORPORATION BHD
| Research House: RHB | Price Call: SELL | Target Price: 4.23 |
Top Glove Corp Bhd
(Aug 15, RM5.25)
Maintain underperform at RM5.25 with revised fair value of RM4.23 (from RM4.70): Latex prices have corrected sharply, in tandem with other commodity prices (excluding precious metals) amid concerns of weaker than expected economic growth. As such, we have reduced our latex price assumption to RM8.59 per kg for FY11 (from RM8.69 earlier). Our latex price assumptions of RM7.75 to RM7.90 per kg for FY12/FY13 remain intact.
However, management said sales to Brazil (account for 12% to 13% of total sales) had slowed, caused by the overstocking of gloves by domestic distributors there during the 2009 Influenza A H1N1 outbreak. We believe the recent correction in latex and selling prices may prompt domestic distributors there to increase their inventory levels. Demand for gloves from Top Glove's other markets remain resilient given that there was no overstocking situation earlier, according to management.
With the risk of a double dip recession rising in the United States amid the weakening of the global economic recovery, we expect a stronger ringgit to US dollar rate of RM2.80 to RM2.90 for FY12/FY13 (against RM3.02 currently). The stronger ringgit would adversely impact earnings given that the bulk of Top Glove's sales are denominated in US dollars.
Despite the current demand-supply conditions, management said its capacity expansion plans are on track for Top Glove to increase its total capacity by 6.3 billion pieces per year to 41.55 billion gloves by March 2012. Upon completion of the three new plants, management estimates that Top Glove will attain a global market share of 27%.
The risks include: (i) lower raw material prices (latex and nitrile), which may result in margin expansion; (ii) depreciation of ringgit against the US dollar; and (iii) stronger than expected results from overseas operations.
We have revised down our FY11/FY12/FY13 earnings forecasts by 7.4%/7.6%/14.1% after adjusting for capacity utilisation, average selling prices, US dollar to ringgit rate and raw material price assumptions.
Coupled with the earnings revisions, our fair value is reduced to RM4.23 from RM4.70 based on an unchanged target CY12 price-earnings ratio of 14 times. We make no change to our 'underperform' call. ' RHB Research, Aug 15
This article appeared in The Edge Financial Daily, August 16, 2011.
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