March 16, 2012

TOPGLOV (FV RM6.00- BUY) 1HFY12 Results Review: Higher Sales Offset Lower Selling Prices

Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Research House: OSKPrice Call: BUYTarget Price: 6.00




Higher SalesOffset Lower Selling Prices

The 1HFY12 results were within expectations. On  the surface, the 2QFY12 EBIT was higher by 64.9% q-o-q but excluding a forexgain in 2QFY12 and forex loss in 1QFY12, it was  actually down  8% q-o-q. Meanwhile,  latex  price may inch up slightly in the shorterterm due to the wintering season but in the longer term, the commodity's pricemay fall in view of an potential global supply surplus. Maintain Buy, with anunchanged fair value of RM6.00.

Within estimates.  Top Glove's 1HFY12 results were within consensus and our expectations,making up 54% and 50% of the FY12 forecasts. Overall, the 2QFY12 revenue ofRM549.0m was flattish q-o-q as higher sales volume (up 5% q-o-q) were offset by  lower selling prices of its gloves  due to lower latex cost (down 18%q-o-q).  The 2QFY12 EBIT of RM68.7m wasalso higher q-o-q as it included an unrealized forex gain of RM15.8m while thatfor 1QFY12 included an unrealized forex loss of RM16.0m. However, if weexcluded these unrealized amounts, the 2QFY12 EBIT was actually 8% weaker q-oq.Finally, on a YTD comparison, Top Glove's 1HFY12 revenue jumped 13% due to a 3%q-o-q rise in  sales volume  on the back of a  higher production capacity. The  company's 1HFY12 EBIT was also higher YTD dueto product margin improvement and the minimal impact from forex as the 1HFY12numbers included an unrealized forex gain of RM5.3m while in 1HFY11 it incurredan unrealized forex loss of RM0.7m.

High latex price maynot be sustainable in the long run. According to Top Glove's presentationwhich included data from the International Rubber Study Group, although the globalrubber surplus is forecast to drop from 50k tonnes in 2011 to 31k tonnes in2012, this surplus is expected to go up to 74k tonnes  and 190k  tonnes in 2013 and 2014 respectively. Hence, although latex may go  up slightly from the  current  price of close to RM8.00/kg due to thewintering season  for  rubber trees, we  do not foresee this price remaining high  over  the longer term.  However,  a reasonable price would be around RM7.00-RM7.50/kgsince the Thai Government has proposed a floor price for hard rubber of  RM11.84/kg, which  infers that the floor price  for latex should be at RM7.10/kg since latex comprises 60% hard rubber and 40%water.

Maintain Buy. Ourfair value for Top Glove remains unchanged at RM6.00, based on the existing PERof 20x, as we roll forward to the company's FY13 earnings.

Source: OSK188

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