RUBBER PRODUCTS

TOP GLOVE CORP

(TOPG MK, TPGC.KL) 18 June 2014
3QFY14: A lacklustre quarter
Company report
HOLD
Cheryl Tan
cheryl-tan@ambankgroup.com
+603 2036 2333
(Maintained)
Rationale for report: Company Result

Price RM4.51
Fair Value RM4.80
52-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 2,803.8
Core net profit (RMmil) 196.5 177.5 185.7 199.6
EPS (Sen) 31.7 28.7 30.0 32.2
EPS growth (%) n/a n/a 4.6 7.5
Consensus EPS (Sen) 31.6 32.3 35.0 38.2
DPS (Sen) 16.0 16.0 16.0 16.0
PE (x) 14.2 15.7 15.0 14.0
EV/EBITDA (x) 8.7 8.8 8.1 7.4
Div yield (%) 3.5 3.5 3.5 3.5
ROE (%) 15.2 12.9 12.8 12.9
Net Gearing (%) n/a n/a n/a n/a

Stock and Financial Data

Shares Outstanding (million) 619.5
Market Cap (RMmil) 2,793.9
Book value (RM/share) 2.15
P/BV (x) 2.1
ROE (%) 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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5.00
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TopGlove FBMKLCI


PP 12247/06/2013 (032380)
Investment Highlights

We maintain our HOLD recommendation on Top Glove but lower
our 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%) continued
to 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 negatively
impacted 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 its
China 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 a
subdued 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 that
Top 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 latex
and 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%), yields
are presently at a decent 3.5%.
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
Top Glove Corp 18 June 2014
AmResearch Sdn Bhd 3
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Top Glove Corp 18 June 2014
AmResearch Sdn Bhd 4
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 2,803.8
EBITDA 297.4 313.1 294.4 315.5 341.8
Depreciation (69.2) (80.4) (86.0) (91.1) (95.8)
Operating income (EBIT) 228.2 232.7 208.4 224 246.0
Other income & associates 0.3 (2.5) 1.5 1.5 1.0
Net interest 12.2 11.9 14.3 10.3 9.3
Exceptional items 0.0 0.0 0.0 0.0 0.0
Pretax profit 240.7 242.2 224.2 236.2 256.3
Taxation (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 202.7 196.5 177.5 185.7 199.6
Core 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 25.2
Other 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 1,167.7
Cash & equivalent 167.2 123.1 289.0 330.1 383.9
Stock 179.4 219.7 185.5 202.0 222.6
Trade debtors 277.0 282.9 257.1 279.5 307.3
Other current assets 186.8 109.8 81.4 86.9 98.6
Total current assets 810.5 735.5 813.0 898.5 1,012.4
Trade creditors 117.0 117.6 168.6 183.7 202.4
Short-term borrowings 0.2 55.6 75.6 95.6 115.6
Other current liabilities 157.2 191.8 191.8 191.8 191.8
Total current liabilities 274.4 365.0 436.0 471.1 509.8
Long-term borrowings 2.8 2.8 2.8 2.8 2.8
Other long-term liabilities 41.0 45.7 45.7 45.7 45.7
Total long-term liabilities 43.8 48.6 48.6 48.6 48.6
Shareholders funds 1,255.4 1,331.9 1,410.2 1,496.8 1,597.3
Minority interests 24.5 26.0 24.5 24.5 24.5
BV/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 240.7 242.2 224.2 236.2 256.3
Depreciation 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 264.6 247.0 369.3 272.2 285.0
Capital 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 0.0
Others 12.3 9.9 0.0 0.0 0.0
Cash flow from investing (162.5) (258.0) (150.0) (150.0) (150.0)
Debt raised/(repaid) (0.2) 98.1 15.0 15.0 15.0
Equity raised/(repaid) 1.2 5.5 2.0 2.0 2.0
Dividends paid (85.5) (105.4) (99.1) (99.1) (99.1)
Others 0.0 0.0 0.0 0.0 0.0
Cash flow from financing (84.5) (1.8) (82.1) (82.1) (82.1)
Net cash flow 17.6 (12.8) 137.2 40.1 52.9
Net cash/(debt) b/f 148.8 167.2 150.8 289.0 330.1
Net 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 8.3
Pretax margins (%) 10.4 10.5 9.6 9.3 9.1
Net profit margins (%) 8.8 8.5 7.6 7.3 7.1
Interest cover (x) 2,019.6 317.5 284.3 306.2 335.6
Effective tax rate (%) 13.9 16.3 18.0 18.0 19.0
Net dividend payout (%) 48.8 50.4 55.8 53.4 49.7
Debtors turnover (days) 42 44 42 38 38
Stock turnover (days) 28 31 32 28 28
Creditors turnover (days) 18 19 22 25 25

Source: Company, AmResearch estimates
Top Glove Corp 18 June 2014
AmResearch Sdn Bhd 5

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Fax: ( 03) 2078- 3162

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AmResearch Sdn Bhd (335015-P)
(A member of the AmInvestment Bank Group)
15t h Fl oor Bang unan AmBank Gr oup
55 Jalan Raja Chulan
50200 Kuala Lumpur
Tel: ( 03) 2070- 2444 ( r esear c h)
Fax: ( 03) 2078- 3162


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Managing Director