March 9, 2012

Top Glove: Eyes acquisition this year

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: ECMLIBRAPrice Call: SELLTarget Price: 4.00



Top Glove Corp Bhd (TOPG MK, Sell, TP: RM4.00) aims to buy at least one other glove producer this year as part of its strategy to gain market share and drive earnings, said chairman and founder Tan Sri Lim Wee-Chai. The company is in talks with a number of rubber glove manufacturers, Lim told Reuters in an interview. "We are mainly talking to companies from Malaysia. When the pricing and everything is right, we can see something by the end of this year," he said. Lim said Top Glove is well placed to make acquisitions on its strong net cash position. The company had some RM300m net cash as of 29 Feb this year. (Financial Daily)

Comments: This news is not new to us as it was already highlighted in the company's analyst briefing in early January 2012. We have yet to factor in any earnings contribution from the potential acquisition to Top Glove's bottomline. Top Glove's current utilization rate is at 70%. In terms of capacity utilization breakdown, powder-free and nitrile are running at 80% while powdered is at 60%. In anticipation of higher demand for powder-free and nitrile gloves, Top Glove's planned production capacity is expected to gradually increase by 5.7bn gloves to 43bn by August 2012. However, with lower 1QFY12 (-5% y-o-y) sales volume, the additional capacity could lead to excess capacity. Since our downgrade in January 2012, the stock is down 10%. Maintain Sell on Top Glove with TP of RM4.00 based on 18x CY12 EPS, in line with its historical average. Top Glove is trading at 21x FY12 EPS (28% above its historical average of 18x) vis-a-vis earnings growth averaging 13% in FY12-14 implying a rich PE valuation. (Raymond Choo)


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