Top Glove 140618

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RUBBER PRODUCTS

TOP GLOVE CORP(TOPG MK, TPGC.KL) 18 June 2014

3QFY14: A lacklustre quarter

Company report HOLD

Cheryl Tan

[email protected]

+603 2036 2333

(Maintained)

Rationale for report: Company Result

Price RM4.51Fair Value RM4.8052-week High/Low RM6.51/RM4.51

Key Changes

Fair value EPS

YE to Aug FY13 FY14F FY15F FY16F

Revenue (RMmil) 2,313.2 2,345.9 2,550.0 2,803.8Core net profit (RMmil) 196.5 177.5 185.7 199.6

EPS (Sen) 31.7 28.7 30.0 32.2EPS growth (%) n/a n/a 4.6 7.5Consensus EPS (Sen) 31.6 32.3 35.0 38.2DPS (Sen) 16.0 16.0 16.0 16.0PE (x) 14.2 15.7 15.0 14.0EV/EBITDA (x) 8.7 8.8 8.1 7.4Div yield (%) 3.5 3.5 3.5 3.5ROE (%) 15.2 12.9 12.8 12.9Net Gearing (%) n/a n/a n/a n/a

Stock and Financial Data

Shares Outstanding (million) 619.5

Market Cap (RMmil) 2,793.9Book value (RM/share) 2.15P/BV (x) 2.1ROE (%) 15.2

Net Gearing (%) n/a

Major Shareholders Tan Sri Dr. Lim, Wee-Chai (28.9%)KWAP (7.0%)

Free Float (%) 46.7

Avg Daily Value (RMmil) 6.1

Price performance 3mth 6mth 12mth

Absolute (%) (19.1) (21.1) (27.4)Relative (%) (22.3) (23.0) (35.1)

897

1,168

1,439

1,710

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Top Glove FBMKLCI

PP 12247/06/2013 (032380)

Investment Highlights

We maintain our HOLD recommendation on Top Glove but lowerour fair value to RM4.80/share (from RM5.55/share) following its

weak 3QFY14 results. We continue to peg our valuation to an

FY15F PE of 16x, its 5-year mean.

Top Glove posted a net profit of RM42.4mil for 3QFY14 (QoQ:+2%), bringing its 9MFY14 earnings to RM134.2mil (YoY: -9%).

Annualised, this was below our recently reduced estimate,

which was already 4% lower than consensus.

The groups revenue growth (QoQ: +4.7%; YoY: -4%) continuedto trail that of its sales volume (QoQ: +6%; YoY: +2%) as selling

prices continued to be weighed down by declining raw material

prices as well as the shift of bargaining power towards the

buyers. YoY, ASPs have slipped by an average 8% while order

lead time has contracted from 60 days to 40 days.

Despite a greater proportion of nitrile gloves in its product mix(3QFY14: 24% vs. 3QFY13: 18%) and its various cost

optimisation programmes, the groups EBITDA margin remained

relatively flat QoQ and YoY. This can be attributed to greater

competition in the nitrile segment and rising costs (i.e. an

additional RM2mil/month to account for the 15% and 19%

respective hikes in electricity and natural gas tariffs).

We note that Top Gloves earnings were also negativelyimpacted by a higher effective tax rate of 22% in 3QFY14.

Following this, management has guided for a rate of 18%

(similar to 9MFY14s) moving forward.

On a more positive note, we gather that the consolidation of itsChina operations (F8 to F15) has been completed and the outfit

is expected to contribute positively from 4Q onwards (losses

have greatly narrowed in 3QFY14). A gain on disposal of F8 of

RM2mil will also be recognised in the upcoming quarter.

In view of its 9M underperformance, our expectations of asubdued 4Q, and higher tax rates; we have cut our FY14F-FY16F

earnings estimates by 8%-16%.

We also foresee further margin compression as we learnt thatTop Glove had passed on a much lower proportion of the

natural gas tariff increase (relative to the usual 80%-100%). This

underlines our view that ease of cost pass-through for the

players is fading. Thus far, it has only raised the ASP of its latex

gloves by US$0.50/1000 pieces.

In addition, the group has to ensure that its lower-margin latexand vinyl (68% and 8% of product mix) glove production lines

are operating at decent utilisation rates to maintain efficiency.

A first single-tier interim dividend of 7 sen/share was declared.Management had stated that its dividends would be the higher

of its 50% payout target or 16 sen/share the total for both FY12

and FY13. Given its share price retracements (YTD: -20%), yieldsare presently at a decent 3.5%.

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Top Glove Corp 18 June 2014

AmResearch Sdn Bhd 2

TABLE 1: RESULTS SUMMARY

YE 31 Aug (RMm) 9M13 9M14 % YoY 2Q14 3Q14 % QoQ

Turnover 1,765.1 1,696.3 (3.9) 548.3 574.0 4.7

Core EBITDA 234.8 235.3 0.2 73.5 78.4 6.7

Net Interest Expense (0.2) (1.1) (0.4) (0.5)

Depreciation (60.6) (68.7) (22.8) (24.1)

Pre-Exceptional Profit 174.1 165.0 (5.2) 50.3 53.9 7.2

Exceptional - - - -

Associates 1.1 2.1 (0.2) 1.2

Pretax Profit 175.1 167.1 (4.6) 50.1 55.1 10.0

Taxation (23.4) (29.9) (7.9) (12.1)

Minorities (3.7) (3.0) (0.7) (0.6)

Net Profit 148.1 134.2 (9.4) 41.6 42.4 2.0

Core net profit 148.1 134.2 (9.4) 41.6 42.4 2.0

EPS (sen) 23.91 21.63 6.70 6.83

Gross DPS (sen) 7.0 7.0 - 7.0

Core EBITDA margin (% ) 13.3 13.9 0.6 13.4 13.7

Pretax margin (% ) 9.9 9.8 9.1 9.6

Effective tax rate (% ) 13.3 17.9 15.7 22.0

Source: Company / AmResearch

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TABLE 2 : FINANCIAL DATA

Income Statement (RMmil, YE 31

Aug)

2012 2013 2014F 2015F 2016F

Revenue 2,314.5 2,313.2 2,345.9 2,550.0 2,803.8EBITDA 297.4 313.1 294.4 315.5 341.8Depreciation (69.2) (80.4) (86.0) (91.1) (95.8)Operating income (EBIT) 228.2 232.7 208.4 224 246.0Other income & associates 0.3 (2.5) 1.5 1.5 1.0

Net interest 12.2 11.9 14.3 10.3 9.3Exceptional items 0.0 0.0 0.0 0.0 0.0Pretax profit 240.7 242.2 224.2 236.2 256.3Taxation (33.4) (39.4) (40.4) (42.5) (48.7)Minorities/pref dividends (4.6) (6.3) (6.3) (8.0) (8.0)

Net profit 202.7 196.5 177.5 185.7 199.6Core net profit 202.7 196.5 177.5 185.7 199.6

Balance Sheet (RMmil, YE 31 Aug) 2012 2013 2014F 2015F 2016F

Fixed assets 734.4 928.8 985.0 1,043.9 1,098.0

Intangible assets 20.1 25.2 25.2 25.2 25.2Other long-term assets 33.0 82.0 96.2 73.4 44.4

Total non-current assets 787.5 1,036.0 1,106.4 1,142.5 1,167.7Cash & equivalent 167.2 123.1 289.0 330.1 383.9Stock 179.4 219.7 185.5 202.0 222.6Trade debtors 277.0 282.9 257.1 279.5 307.3

Other current assets 186.8 109.8 81.4 86.9 98.6Total current assets 810.5 735.5 813.0 898.5 1,012.4Trade creditors 117.0 117.6 168.6 183.7 202.4Short-term borrowings 0.2 55.6 75.6 95.6 115.6

Other current liabilities 157.2 191.8 191.8 191.8 191.8Total current liabilities 274.4 365.0 436.0 471.1 509.8Long-term borrowings 2.8 2.8 2.8 2.8 2.8Other long-term liabili ties 41.0 45.7 45.7 45.7 45.7Total long-term liabilities 43.8 48.6 48.6 48.6 48.6Shareholders funds 1,255.4 1,331.9 1,410.2 1,496.8 1,597.3Minority interests 24.5 26.0 24.5 24.5 24.5BV/share (RM) 2.03 2.15 2.28 2.42 2.58

Cash Flow (RMmil, YE 31 Aug) 2012 2013 2014F 2015F 2016F

Pretax profit 240.7 242.2 224.2 236.2 256.3Depreciation 69.2 80.3 86.0 91.1 95.8

Net change in working capital (28.5) (10.8) 88.2 (23.9) (29.7)Others (16.8) (64.8) (29.1) (31.2) (37.4)Cash flow from operations 264.6 247.0 369.3 272.2 285.0Capital expenditure (142.7) (255.8) (150.0) (150.0) (150.0)Net investments & sale of fixed assets (32.2) (12.1) 0.0 0.0 0.0Others 12.3 9.9 0.0 0.0 0.0Cash flow from investing (162.5) (258.0) (150.0) (150.0) (150.0)

Debt raised/(repaid) (0.2) 98.1 15.0 15.0 15.0Equity raised/(repaid) 1.2 5.5 2.0 2.0 2.0Dividends paid (85.5) (105.4) (99.1) (99.1) (99.1)Others 0.0 0.0 0.0 0.0 0.0Cash flow from financing (84.5) (1.8) (82.1) (82.1) (82.1)Net cash flow 17.6 (12.8) 137.2 40.1 52.9Net cash/(debt) b/f 148.8 167.2 150.8 289.0 330.1Net cash/(debt) c/f 167.2 150.8 289.0 330.1 383.9

Key Ratios (YE 31 Aug) 2012 2013 2014F 2015F 2016F

Revenue growth (%) 12.7 n/a 1.4 8.7 10.0

EBITDA growth (%) 51.9 5.3 n/a 7.2 8.3Pretax margins (%) 10.4 10.5 9.6 9.3 9.1Net profit margins (%) 8.8 8.5 7.6 7.3 7.1Interest cover (x) 2,019.6 317.5 284.3 306.2 335.6

Effective tax rate (%) 13.9 16.3 18.0 18.0 19.0Net dividend payout (%) 48.8 50.4 55.8 53.4 49.7

Debtors turnover (days) 42 44 42 38 38Stock turnover (days) 28 31 32 28 28Creditors turnover (days) 18 19 22 25 25

Source: Company, AmResearch estimates

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AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group)1 5 t h F l o o r B a n g u n a n A mB a n k Gr o u p55 Jalan Raja Chulan50200 Kuala LumpurTel : (03)2070-24 44 ( research)F a x : ( 0 3 ) 2 0 7 8 - 3 1 6 2

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AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group)1 5 t h F l o o r B a n g u n a n A mB a n k Gr o u p55 Jalan Raja Chulan50200 Kuala LumpurTel : (03)2070-24 44 ( research)F a x : ( 0 3 ) 2 0 7 8 - 3 1 6 2

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in thisreport may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or asolicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to tim e have a position in or withthe securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company andaffiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources thatwe believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair andreasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted forany loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of thisdate and are subject to change without notice.

For AmResearch Sdn Bhd

Benny ChewManaging Director

Top Glove 140618

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