Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Top Glove Corp Bhd
(Oct 5, RM4.38)
Maintain sell with revised target price of RM3.40 from RM4.40: Top Glove's upcoming 4QFY11 results are likely to disappoint by 33%. Though the share price has rebounded on the weaker ringgit against the US dollar (still down 30% from its low in August 2011), we would continue to avoid Top Glove as the negative impact of lower demand for its latex glove (70% of capacity) outweighs the positive impact of a stronger US dollar, and we do not foresee the cost of latex coming off significantly. Additionally, its CY12 price-earnings ratio (PER) valuation is expensive at 19 times. We cut FY11 to FY13 earnings per share (EPS) forecasts by 9% to 19% and lower discounted cash flow-derived target price (TP) to RM3.40 (-23%), indicating 15 times CY12 PER.
Results for 4QFY11 are due on Oct 11 and we expect sequentially flat net profit (3QFY11: RM26 million) on flat sales volume (estimated 5.8 billion pieces) and stable margin (earnings before interest and tax [Ebit]: 9%). Sales volume has been persistently poor. Net profit for FY11 is likely to come in at RM114 million, 10% below consensus. The structural demand switch from latex gloves to nitrile has left 40% of its latex lines unutilised against 100% utilisation for the nitrile lines. Actual FY11 sales volume is now estimated at 23 billion pieces, 6% below our forecast.
We think the margin-induced nitrile capacity expansion by the latex-focused glovemakers in the industry should lead to a squeeze in nitrile glove margins. However, we think the extent of the margin compression will be capped by the existing low net margins of the latex-focused players (5% to 10%). Further, aggressive price cutting will result in losses for Top Glove.
Top Glove is a net beneficiary of a stronger US dollar. While the greenback has gained 9% against the ringgit in two months and is trading at RM3.20, Maybank FX Research forecasts that it will return to RM3.05 by end-2012. We have assumed an average rate of RM3.10 in FY12 and RM3 in FY13.
We expect a net dividend per share of six sen in 4QFY11, bringing full-year DPS to 11 sen (FY10: 16 sen, FY09: 11 sen). Our FY11 DPS forecast is based on 57% net profit payout. High foreign shareholding of 35% could continue to weigh on the share price. We advocate investors to switch into Hartalega ('buy', TP: RM6.80) for the potential multiple expansion on its newly gained leadership status. ' Maybank IB Reseach, Oct 5
This article appeared in The Edge Financial Daily, October 6, 2011.
Company Name: TOP GLOVE CORPORATION BHD
| Research House: MAYBANK | Price Call: SELL | Target Price: 3.40 |
Top Glove Corp Bhd
(Oct 5, RM4.38)
Maintain sell with revised target price of RM3.40 from RM4.40: Top Glove's upcoming 4QFY11 results are likely to disappoint by 33%. Though the share price has rebounded on the weaker ringgit against the US dollar (still down 30% from its low in August 2011), we would continue to avoid Top Glove as the negative impact of lower demand for its latex glove (70% of capacity) outweighs the positive impact of a stronger US dollar, and we do not foresee the cost of latex coming off significantly. Additionally, its CY12 price-earnings ratio (PER) valuation is expensive at 19 times. We cut FY11 to FY13 earnings per share (EPS) forecasts by 9% to 19% and lower discounted cash flow-derived target price (TP) to RM3.40 (-23%), indicating 15 times CY12 PER.
Results for 4QFY11 are due on Oct 11 and we expect sequentially flat net profit (3QFY11: RM26 million) on flat sales volume (estimated 5.8 billion pieces) and stable margin (earnings before interest and tax [Ebit]: 9%). Sales volume has been persistently poor. Net profit for FY11 is likely to come in at RM114 million, 10% below consensus. The structural demand switch from latex gloves to nitrile has left 40% of its latex lines unutilised against 100% utilisation for the nitrile lines. Actual FY11 sales volume is now estimated at 23 billion pieces, 6% below our forecast.
We think the margin-induced nitrile capacity expansion by the latex-focused glovemakers in the industry should lead to a squeeze in nitrile glove margins. However, we think the extent of the margin compression will be capped by the existing low net margins of the latex-focused players (5% to 10%). Further, aggressive price cutting will result in losses for Top Glove.
Top Glove is a net beneficiary of a stronger US dollar. While the greenback has gained 9% against the ringgit in two months and is trading at RM3.20, Maybank FX Research forecasts that it will return to RM3.05 by end-2012. We have assumed an average rate of RM3.10 in FY12 and RM3 in FY13.
We expect a net dividend per share of six sen in 4QFY11, bringing full-year DPS to 11 sen (FY10: 16 sen, FY09: 11 sen). Our FY11 DPS forecast is based on 57% net profit payout. High foreign shareholding of 35% could continue to weigh on the share price. We advocate investors to switch into Hartalega ('buy', TP: RM6.80) for the potential multiple expansion on its newly gained leadership status. ' Maybank IB Reseach, Oct 5
This article appeared in The Edge Financial Daily, October 6, 2011.
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