AmWatch - Top Glove : Special dividend a pleasant surprise BUY, 3 Nov 2015

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Top Glove : Special dividend a pleasant surprise                BUY

Top Glove Corp yesterday announced that the group is proposing a special single tier final dividend of \3sen/share for the financial year ended 31 Aug 2015. The group last paid out a special dividend in FY09, when its net profit grew by 54% YoY, similar to FY15’s YoY growth of 55%. This special dividend will raise Top Glove’s total dividends for FY15 to 23 sen and implies a payout of 50% for FY15. This translates to a yield of ~2.5%. We are not entirely surprised by this announcement given the group’s strong performance in FY15. We believe that this move was also spurred by concerns from the investment community, which had questioned the group’s commitment to its dividend policy. While the group’s earlier recommended DPS for FY15 of 20 sen was its highest ever, the 44% payout was below its policy of a minimum 50% payout. Management had then explained that the policy is subjected to various clauses, including the company’s projected capex and M&A activities.

Along the same vein, we note that news of the group looking to acquire condom makers as highlighted by the media is not new. Management has always looked towards M&As as a means of expansion (e.g. GMP Medicare and Medi-Flex) on top of its usual organic growth. Its list of targets includes other glove players, former and packaging suppliers as well as condom makers. The group has a strong balance sheet with net cash of RM186.5mil (including its liquid short-term investments).

Given the absence of any new developments, we maintain our BUY call for Top Glove with an unchanged fair value of RM10.60/share, pegged to an unchanged FY16F PE of 21x. Since we last raised our fair value on 21 Oct, its share price had risen by another 5%. YTD, the stock has advanced by 110%, vs. the FBM KLCI’s -5% and its peers’ average of +54%. That said, its valuations are still attractive. Top Glove is currently trading at an FY16F PE of 18x – midway of its 5-year PE band. Its peers Kossan and Hartalega are presently trading at forward PEs of 26x and 29x, respectively.

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