Top Glove Corporation - MARKET PERFORM - 16 March 2012

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 4.36

Top Glove reported a 1H12 net earnings of RM84.9m, which wasabove ours (65%) but in line with the consensus (55%) estimates. QoQ earningsincreased by 70% with an improved margins of 9.7% (vs 5.7% in 1Q12) dueprimarily to a lower latex price, which has retraced by 18% on a QoQ basis.YoY, the quarter's earnings have also improved by 110%. However, the latexprice has rebounded and is now hovering around RM7.93/kg, which may see somemargins compression in the next quarter. Nonetheless, due to the impressive results,we have increased our earnings forecasts for FY12 and FY13 by 17% and 27%respectively. As a result, we are upgrading our target price from RM3.74 to RM4.36and raising our UNDERPERFORM rating on Top Glove to a MARKET PERFORM.

Above estimates.Top Glove's 1HFY12 net earnings of RM84.9m were above our expectations, makingup 65% of our forecast. The results were, however, in line with the consensus estimateas it makes up 55% of the consensus number. There was an improvement in theearnings on both a QoQ and YoY basis, which went up by 70% and 110%respectively. Margins have also risen from 5.2% to 9.7%. This is due to a lowerlatex price, which retraced by 18% during the quarter. Meanwhile, the averageUSD in 2Q12 has strengthened against the Ringgit by 2% from RM3.07/USD in 1Q toRM3.13/USD in 2Q), which resulted in  a  net  gain  in foreign  exchange  of RM15.8m  (vs.  last quarter's net loss of RM16m).

Favourable latexprice.  Latex price (2Q: RM6.81/kg),which makes up 59% of the cost, has retreated by about 18% and 25% respectivelyon a QoQ and YoY basis for the quarter (1Q12: RM8.34/kg and 2Q11: RM9.10/kg).However, the price has since rebounded and is now hovering around RM7.93/kg.Hence, we may see some margins compression for the next quarter given thehigher latex price now and the timing difference in the depreciation of theUSD. 

Venturing into rubberplantation. In order to mitigate latex cost increases in the future, TopGlove has started venturing into the upstream business by acquiring a piece ofland with a total area of about 10,000 hectares (net planted area is 8,000 hectares)for its rubber plantation in Cambodia. Total capex (including land, plantingand facilities) for the project cost is RM160m, spread over a planting periodof 6 years. According to management, yield per annum is estimated at 4.2 tonnesper hectare. Based on our estimate, this would generate between 15%-20% of TopGlove's current annual latex consumption. 

Recommendation.Due to the strong results, we have increased our earnings forecasts for FY12and FY13 by 17% and 27% respectively. Hence, we are upgrading our target pricefrom RM3.74 to RM4.36. Our valuation is based on 17.7x FY12 EPS. With theincrease in the target price, we are also upgrading our call on Top Glove to aMARKET PERFORM from an UNDERPERFORM previously.

Source: Kenanga