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RUBBER PRODUCTS

RUBBER PRODUCTS Company report Cheryl Tan cheryl-tan@ambankgroup.com +603 2036 2333 TOP GLOVE CORP (TOPG MK, TPGC.KL)
RUBBER PRODUCTS Company report Cheryl Tan cheryl-tan@ambankgroup.com +603 2036 2333 TOP GLOVE CORP (TOPG MK, TPGC.KL)

Company report

Cheryl Tan cheryl-tan@ambankgroup.com +603 2036 2333

TOP GLOVE CORP

(TOPG MK, TPGC.KL)

18 June 2014

3QFY14: A lacklustre quarter

HOLD

(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) Core net profit (RMmil) EPS (Sen) EPS growth (%) Consensus EPS (Sen) DPS (Sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%)

2,313.2

2,345.9

2,550.0

2,803.8

196.5

177.5

185.7

199.6

31.7

28.7

30.0

32.2

n/a

n/a

4.6

7.5

31.6

32.3

35.0

38.2

16.0

16.0

16.0

16.0

14.2

15.7

15.0

14.0

8.7

8.8

8.1

7.4

3.5

3.5

3.5

3.5

15.2

12.9

12.8

12.9

n/a

n/a

n/a

n/a

Stock and Financial Data

Shares Outstanding (million) Market Cap (RMmil) Book value (RM/share) P/BV (x) ROE (%) Net Gearing (%)

619.5

2,793.9

2.15

2.1

15.2

n/a

Major Shareholders

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

Free Float (%) Avg Daily Value (RMmil)

46.7

6.1

Price performance

3mth

6mth

12mth

Absolute (%)

(19.1)

(21.1)

(27.4)

Relative (%)

(22.3)

(23.0)

(35.1)

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 group’s 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 group’s 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 Glove’s 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 9MFY14’s) 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.

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Top Glove
FBM KLCI
PP 12247/06/2013 (032380)

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

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

9.1 9.6 Effective tax rate (% ) 13.3 17.9 15.7 22.0 Source: Company / AmResearch AmResearch

AmResearch Sdn Bhd

2

Top Glove Corp

18 June 2014

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Top Glove Corp

18 June 2014

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

28 Creditors turnover (days) 18 19 22 25 25 Source: Company, AmResearch estimates AmResearch Sdn Bhd

AmResearch Sdn Bhd

4

Top Glove Corp

18 June 2014

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