AmWatch - Top Glove : Impact of slow adoption of nitrile catches up HOLD, 2 Oct 2014

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Top Glove : Impact of slow adoption of nitrile catches up              HOLD

We maintain HOLD on Top Glove Corp with an unchanged fair value of RM4.80/share following our recent company visit. Our valuation is pegged to an unchanged FY15F PE of 16x – its 5-year mean.

We expect Top Glove’s FY14F-FY16F earnings growth to be subdued as demand for its products remains lacklustre and as margin pressure weighs. Top Glove’s sales volume is likely to rise at a lower rate (vis-à-vis the global demand growth of 8%-10% p.a.) in the near term, dragged by its unfavourable product mix. Latex gloves presently make up 68% of the group’s total product mix while nitrile gloves constitute 24%. With its previously proven volume strategy no longer effective following the industry’s structural shift and its late entrance into the nitrile segment, we opine that the group had been compelled to compete on price to gain market share. Management, however, believes that the low ASP is due to overcapacity in the segment.

The group is holding back its expansion plans. It is targeting to add only 2.6bil pcs by end-FY15F to its current installed capacity of 42bil pcs. The YoY growth in capacity of 1%-5% is lower than its previous years’ average of 10%. We note that Top Glove’s EBITDA margin has remained relatively flat at ~14% despite its ongoing expansion up the value chain into the nitrile segment. Management attributes this to cost pressure and stiff competition which limit its ability to pass on the cost increases.

In response to recent reports of a 30% cap on foreign ownership of Indonesian plantation land (which includes rubber estates), management said it is open to JVs to pare down its 95% stake in PT Agro Pratama Sejahtera. We are keeping our FY14F-FY16F earnings estimates for now pending the release of its full year results on 14 Oct. An analyst briefing is also scheduled for 16 Oct.

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