Top Glove Corp Bhd
(Oct 6, RM5.69)
Maintain underperform at RM5.66 with fair value of RM5.30: Medi-Flex (not rated), reported on Oct 5 full-year core net profit of RM6.6 million, a turnaround from a core net loss of RM4.6 million in FY09.
We believe the improvement in earnings was largely due to higher utilisation rates, which resulted in earnings before interest and tax (Ebit) margin expansion, notwithstanding higher latex cost (49.3% year-on-year) and weakening US dollar against the ringgit (-7% y-o-y).
Half-on-half (h-o-h), revenue rose 17% on the back of a higher average utilisation rate of 90% versus 85% in 1H10, as Medi-Flex switched from the production of clean room gloves to medical gloves for Top Glove’s existing customers.
However, despite the higher revenue, 2H10’s net profit fell 25.2% h-o-h as a result of a margin contraction due to the time lag in passing on the higher latex cost (+26.4% h-o-h) and weakening US dollar (-5.6% h-o-h).
We remain cautious on the near-term outlook for glove manufacturers on the back of: (i) slowdown in demand for rubber gloves as customers opt to run down their inventory levels due to the high latex price; (ii) high latex price; and (iii) weakening US dollar against ringgit (by around 10.5% year-to-date). We believe the slowdown in orders would adversely affect Top Glove. It will be harder to adjust prices to pass on higher costs to customers.
The risks include: (i) sharp drop in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; (ii) a weakening ringgit against the US dollar; (iii) execution risk from its capacity expansion; and (iv) stronger than expected results from overseas operations.
We have left our earnings forecasts unchanged for now. We have retained both our indicative fair value of RM5.30 (based on target CY11 PER of 12.5 times) and “underperform” call on the stock. — RHB Research Institute, Oct 6
This article appeared in The Edge Financial Daily, October 7, 2010.
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