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PP 7767/09/2011(028730)

7 October 2010

Malaysia
RHB Research
Institute Sdn Bhd
Corporate Highlights A member of the
RHB Banking Group
Company No: 233327 -M

MARKET DATELINE
R e su lts N ot e 7 October 2010

Share Price : RM5.69

Top Glove Corporation Fair Value


Recom
:
:
RM5.40
Underperform
FY10 Net Profit Grew 45% YoY (Maintained)

Table 1 : Investment Statistics (TOPGLOV; Code: 7113) Bloomberg: TOPG MK


Net Core Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
Aug (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 2,079.4 245.3 41.6 41.6 45.0 13.7 - 26.2 net cash 25.5 3.7
2010f 2,135.5 244.2 41.4 41.4 -0.4 13.7 44.0 5.8 net cash 21.0 5.3
2011f 2,427.4 271.5 46.0 46.0 11.2 12.4 47.0 5.2 net cash 20.9 5.7
2012f 2,738.6 296.1 50.2 50.2 9.0 11.3 - 2.4 net cash 20.6 4.2
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excludes EI * Consensus Based On IBES

RHBRI Vs. Consensus


♦ Within expectations. Top Glove’s 4QFY08/10 net profit of RM45.1m (- Above
20.7% yoy; -30.1% qoq) was within our but below consensus expectations √ In Line
with full-year net profit of RM245.3m (+45% yoy) accounting for 102% Below √
and 96% of our and consensus full-year estimates respectively.
Issued Capital (m shares) 618.2
♦ Qoq, revenue fell 2.6% but net profit slipped 30.1% qoq. Qoq, Market Cap (RMm) 3,517.5
revenue fell 2.6% as a result of lower sales volume (-2.0% qoq) as Daily Trading Vol (m shs) 1.7
52wk Price Range (RM) 2.90-7.24
customers opted to run down their inventory due to the high latex price.
Major Shareholders: (%)
4Q10 net profit, however, fell 30.1% qoq as EBITDA margin contracted by
Tan Sri Dr Lim & family 38.6
7%-pts qoq resulting from the time lag in passing on the weaker US$,
Overlook Partners Fund 5.0
partly offset by tax savings of RM4.1m due to overprovisions in tax in the Matthews International 5.2
previous quarters and lower interest cost (37.6% qoq) during the quarter.
FYE Aug FY11 FY12 FY13
♦ Declared final single DPS of 9 sen. Top Glove declared a final tax- EPS chg (%) 0.3 0.3 n.a.
exempt DPS of 9 sen (4Q09: 9 sen TE), slightly below our expected net Var to Cons (%) (5.9) (2.1) n.a.
DPS of 10 sen. Full-year net DPS stood at 16 sen (FY09: 11 sen), which
PE Band Chart
translates to a net payout ratio of 40.3% and net yield of 2.8%.

♦ Strong net cash position of 9.7 sen/share. Top Glove’s cash pile stood
at RM303.1m (vs. RM283.3m as at end-May) while its net cash position PER = 16x
PER = 12x
grew further to RM299.5m (9.7 sen/share) as at end-Aug, from RM273.0m PER = 8x
(8.9 sen/share) as end-May. Management had previously indicated that
they intend to maintain the dividend payout ratio of 40% while conserving
the balance for growth opportunities, either via organically or M&A.

♦ Risks. The risks include: 1) sharp drop in raw material (latex) and/or Relative Performance To FBM KLCI
energy (natural gas) prices, which may result in margin expansion; 2) RM
depreciating against the US$; and 3) stronger-than-expected results from
overseas operations. Top Glove

♦ Forecasts. We have fine-tuned and updated our FY11-12 earnings


forecasts post the full-year results. We introduce our FY13 numbers.
FBM KLCI
♦ Investment case. Our fair value has been raised by 0.3% to RM5.40
based on unchanged target CY11 PER of 12.5x. In our view, the near-term
outlook for the rubber glove manufacturers remains challenging due to the
slowdown in orders for rubber gloves as latex prices remain high and
weaker US$. Our Underperform call on the stock remains unchanged. David Chong, CFA
(603) 9280 2179
david.chong@rhb.com.my

Please read important disclosures at the end of this report.

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Table 2: Quarterly Results


QoQ YoY YoY
FYE Aug (RMm) 4Q09 3Q10 4Q10 FY09 FY10 Comments
(%) (%) (%)
Revenue 424.5 555.9 541.4 (2.6) 27.5 1,529.1 2,079.4 36.0 FY10 growth largely driven by
additional capacity from F19 & F20,
which helped meet the rising
demand. Lower qoq due to
slowdown in orders as customers
opt to run down their inventory
levels due to the high latex prices.

EBITDA 95.0 97.7 57.2 (41.4) (39.7) 288.5 366.7 27.1


Depreciation (14.0) (14.5) (15.0) 3.9 7.8 (57.0) (59.1) 3.7
Operating profit 81.0 83.3 42.2 (49.3) (47.9) 231.5 307.6 32.9
Interest expense (1.5) (0.1) (0.1) (37.6) (95.7) (8.5) (0.6) (92.5) Total debt as at end-4Q10 was
RM3.6m against RM10.9m as at
end-3Q10 and RM20.5m as at end-
4Q09.
Associates (0.1) 0.2 0.0 (87.5) >100 (1.0) (0.9) (3.8) Mainly relates to Medi-Flex’s share
of associate’s losses.
Pre-tax profit 79.5 83.3 42.2 (49.4) (46.9) 222.0 306.0 37.9
Tax (24.5) (17.9) 4.1 >100 >100 (53.9) (55.6) 3.1
Minority interest 1.8 (0.9) (1.2) 30.8 >100 1.1 (5.1) >100
Net profit 56.8 64.5 45.1 (30.1) (20.7) 169.1 245.3 45.0

Margins (%)
EBITDA 22.4 17.6 10.6 18.9 17.6 Qoq margin contraction due to time
lag in passing on weakening US$
while FY10 margin contraction was
due to high latex cost (+49.3%
yoy) and weakening US$ (-2.6%
yoy).
Operating profit 19.1 15.0 7.8 15.1 14.8
Pre-tax 18.7 15.0 7.8 14.5 14.7
Effective tax rate 30.8 21.5 (9.6) 24.3 18.2 4Q10 effective tax rate remains
below statutory rate due to
reinvestment allowances and tax-
free status of certain overseas
subsidiaries.
Net profit 13.4 11.6 8.3 11.1 11.8

Segmental revenue
Malaysia 343.3 443.9 432.6 (2.5) 26.0 1,219.5 1,679.6 37.7
Thailand 36.7 58.9 57.5 (2.4) 56.9 126.9 206.7 62.9
China 24.7 23.0 22.4 (2.8) (9.6) 104.0 87.2 (16.2) Lower yoy due to weaker demand
for vinyl gloves, which have yet to
pick up.
Others 19.8 30.1 29.0 (3.7) 27.5 78.7 106.0 34.6

EBITDA
Malaysia 82.2 89.5 48.3 (46.1) (41.3) 229.7 318.7 38.8
Thailand 11.0 11.3 10.5 (6.7) (4.4) 43.9 48.9 11.4
China 2.7 (2.6) (1.8) (28.3) ->100 14.5 (1.5) ->100
Others (1.0) (0.5) 0.2 +>100 +>100 0.5 0.6 17.1

EBITDA profit margin (%)


Malaysia 24.0 20.2 11.2 18.8 19.0
Thailand 30.1 19.2 18.3 34.6 23.7
China 11.1 (11.1) (8.2) 13.8 (1.8) FY10 lower due to lower revenue
and high operating cost.
Others (5.2) (1.8) 0.9 0.6 0.6

Source: Company, RHBRI

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Table 3: Earnings Forecasts Table 4: Forecast Assumptions


FYE Aug (RMm) FY10a FY11F FY12F FY13F FYE Aug FY11F FY12F FY13F

Turnover 2,079.4 2,135.5 2,427.4 2,738.6 Capacity (bn pcs p.a.) 39.9 41.8 43.3
Turnover growth (%) 109.5 2.7 13.7 12.8 Capacity utilisation (%) 77.5 82.5 85.0
Change in ASP (%) 1.0 1.0 2.0
EBITDA 366.7 389.6 431.2 467.3
EBITDA margin (%) 17.6 18.2 17.8 17.1

Depreciation (59.1) (66.3) (72.8) (79.3)

EBIT 307.6 323.3 358.4 388.0


EBIT margin (%) 14.8 15.1 14.8 14.2
Net Interest (0.6) (0.6) (0.6) (0.6)
Associates (0.9) 1.0 2.0 5.0

Pretax Profit 306.0 323.6 359.8 392.4


Tax (55.6) (74.4) (82.8) (90.2)
Minorities (5.1) (5.0) (5.5) (6.0)
Net Profit 245.3 244.2 271.5 296.1
Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer,
invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no
reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an
interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular
investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend
on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or
damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans of
any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other services
from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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