Fair Value : RM11.60
Recom : Outperform
♦ 1Q10 net profit up 90.9% yoy. Top Glove’s 1QFY08/10 results were above our and consensus expectations with 1Q net profit of RM65.2m (+90.9% yoy) accounting for 35.6% and 33.9% of our and consensus fullyear estimates respectively. The key variances were: 1) stronger-thanexpected margins, which managed to remain resilient qoq despite higher latex cost and weakening US$; and 2) lower-than-expected finance cost. As expected, no dividend was declared for the quarter.
♦ Qoq, revenue and net profit increased by 10.5% and 14.7% respectively. Qoq, revenue grew 10.5% as a result of upward adjustments made to selling prices to pass on the higher latex cost (+19.4% qoq) as well as weakening US$ (-2.8% qoq). This caused its EBITDA margin to contract by 0.5%-pt qoq. However, coupled with lower interest cost (-72.9% qoq) and lower effective tax rate of 23.2% (4Q09: 30.4%), 1Q10 net profit jumped 14.7% qoq.
♦ Net cash/share of 14.5 sen as at end-Nov. Top Glove’s net cash position grew to RM222.0m (14.5 sen/share) as at end-Nov from RM165.3m (11.6 sen/share) as end-Aug. Top Glove remains on the lookout for potential acquisitions and given its healthy cash pile of RM237.1m as at end-Nov, we believe the company would not have too much problems with financing.
♦ Risks. The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; 2) an appreciating RM against the US$; 3) execution risk from capacity expansion; and 4) weaker-than-expected results from overseas operations.
♦ Forecasts. Following the better-than-expected margins achieved by Top Glove, we are raising our FY10/11/12 EBITDA margins to 20.2%/19.5%/18.8% (from 17.0%/15.9%/15.5%) respectively. At the same time, we have reduced our FY10-12 finance cost projections by 75- 80.5%, but raised our FY10-12 effective tax rate assumptions to 23% (20% flat previously). As a result, we have raised our FY10-12 earnings forecasts by 21.0-25.1% respectively.
♦ Investment case. Our fair value has been raised to RM11.60 (from RM9.50) based on unchanged target CY10 PER of 15x. No change to our Outperform call on the stock.
52wk Price Range (RM) 3.50-9.53
Major Shareholders: (%)
Tan Sri Dr Lim & family 38.7
Overlook Partners Fund 5.4
Matthews International 5.2
By RHBinvest
Analyst: David Chong, CFA
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