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PP 7767/09/2011(028730)

RHB Research

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

B r ief ing N ot e 13 October 2010


MARKET DATELINE
Share Price : RM5.65

Top Glove Corporation Fair Value


Recom
:
:
RM5.40
Underperform
Still Cautious On Near-Term Outlook (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) (%) (%)
2010 2,079.4 245.3 41.6 41.6 122.9 13.6 - 3.3 net cash 25.5 3.8
2011f 2,135.5 244.2 41.4 41.4 -0.4 13.6 41.0 2.8 net cash 20.5 3.8
2012f 2,427.4 271.5 46.0 46.0 11.2 12.3 45.0 2.3 net cash 19.4 4.1
2013f 2,738.6 296.1 50.2 50.2 9.0 11.3 50.0 2.0 net cash 18.2 4.5
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excludes EI * Consensus Based On IBES Estimates
♦ We attended Top Glove’s briefing yesterday and set out below the key Issued Capital (m shares) 618.2
takeaways that we gathered. Market Cap(RMm) 3,429.8
♦ Orders are slowly coming back in 1QFY11 due to seasonality Daily Trading Vol (m shs) 1.9
factors and replenishment of old stocks. Management mentioned that 52wk Price Range (RM) 3.974-7.24
orders are slowly picking up in 1QFY11 largely due to seasonality factors Major Shareholders: (%)
and replenishment of stocks by customers. However, management was Tan Sri Dr Lim & family 38.6
still cautious on the near-term outlook on the demand for gloves as latex Overlook Partners Fund 5.0
Matthews International
price remains stubbornly high (around RM7.54/kg currently) and the 5.2
volatility of exchange rate between US$ against RM. FYE Aug FY10 FY11 FY12
♦ Updates on capacity expansion. Despite the slowdown in orders in EPS chg (%) - - -
4QFY10, management has no plans at this juncture to delay capacity Var to Cons (%) 1.0 2.3 0.4
expansion plans. Top Glove’s factory F21 (+1.5 bn pieces p.a.) is targeted
PE Band Chart
to start commercial production in Nov ’10. Top Glove is also adding 16 new
lines (+1.5 bn pieces p.a.) at its existing F7 factory in Thailand, which is
expected to start commercial production by Feb ‘11. The construction of PER = 16x
F22 in Klang, which will house 16 new lines (+1.5 bn pieces p.a.) is PER = 12x
PER = 8x
completed and expected to start commercial production in May ’11. Top
Glove is also putting in 32 new lines (+3.0 bn pieces p.a.) in a completed
factory in Ipoh. Commercial production is expected to start by Aug ‘11. In
total, the expansion plans would increase Top Glove’s annual production
capacity to 41.3 bn pieces by end-FY11 from 33.8bn pieces currently.
♦ Maintaining its 40% payout. As at Aug ‘10, Top Glove’s cash pile stood Relative Performance To FBM KLCI

at RM303.1m (vs. RM185.8m as at Aug ‘09) while its net cash position
grew further to RM299.5m (9.7 sen/share) as at end Aug ‘10, from
RM165.3m (5.3 sen/share) as at end Aug ‘09. Top Glove declared a full-
year net DPS of 16 sen (FY09: 11 sen), which translates to a net payout Top Glove
ratio of 40.3%. Moving forward, management intends to maintain their
40% dividend payout policy and would prefer to conserve cash in case of
FBM KLCI
future M&A opportunities.
♦ Risks. The risks include: 1) sharp drop in raw material (latex) and/or
energy (natural gas) prices, which may result in margin expansion; 2) an
appreciating US$ against the RM; 3) execution risk from capacity
expansion; and 4) stronger-than-expected results from overseas
operations.
♦ Forecasts. We have left our FY11-13 earnings forecasts unchanged for
now.
♦ Investment case. We maintain our fair value of RM5.40, based on David Chong, CFA
unchanged target CY11 PER of 12.5x. We reiterate our Underperform call (603) 9280 2179
on the stock. david.chong@rhb.com.my

Please read important disclosures at the end of this report.Page 1 of 4

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Key Highlights From Briefing

♦ FY10 revenue up by 36.0% yoy but FY10 EBITDA margin contracted 1.3%-pts yoy. To recap, FY10
revenue increased by 36.0% yoy largely driven by additional capacity from F19 and F20. FY10’s EBITDA margin,
however, contracted by 1.3%-pts yoy due to higher latex cost (+49.3% yoy) and weakening US$ (-2.6% yoy).
Nevertheless, FY10 net profit still grew by 45% yoy thanks to lower effective tax rate of 18.2% (vs. 24.3% in
FY09) and lower interest cost (-92.5% yoy). The average utilisation in FY10 was approximately 70-75% as
compared to 85-90% in FY09 as demand in 4Q10 experienced some slight slowdown as customers opted to run
down their inventory due to high latex price as well as new capacity which came onstream during the quarter. As
at FY10, Top Glove’s product mix remained relatively unchanged as compared to FY09, which consists of 58%
powdered gloves, 25% powder-free, 7% nitrile, 6% vinyl, 3% surgical and 1% others. In terms of geographical
segments, Europe constitutes 33% of Top Glove’s FY10 revenue followed by North America (29%), Latin America
(20%), Asia (9%), Middle East (6%) and the rest of the world (3%).

♦ Orders are slowly coming back in 1QFY11 due to seasonality factors and replenishment of old stocks.
Management mentioned that orders are slowly picking up in 1QFY11 largely due to seasonality factors and
replenishment of stocks by customers. However, management was still cautious on the near-term outlook on the
demand for gloves as latex price remains stubbornly high (around RM7.54/kg currently) and the volatility of
exchange rate between US$ against RM. Nonetheless, the company believes that the long-term prospects for
rubber gloves should remain positive as gloves are deemed as a necessity in the healthcare sector and
recessionary proof against any economic downturn.

♦ Updates on capacity expansion. Despite the slowdown in orders in 4QFY10, management has no plans at this
juncture to delay capacity expansion plans. Top Glove’s factory F21 (+1.5 bn pieces p.a.) is targeted to start
commercial production in Nov ’10. Top Glove is also adding 16 new lines (+1.5 bn pieces p.a.) at its existing F7
factory in Thailand, which is expected to start commercial production by Feb ‘11. The construction of F22 in Klang,
which will house 16 new lines (+1.5 bn pieces p.a.) is completed and expected to start commercial production in
May ’11. Top Glove is also putting in 32 new lines (+3.0 bn pieces p.a.) in a completed factory in Ipoh.
Commercial production is expected to start by Aug ‘11. Should demand continue to be weak for the next 1-2
quarters, the planned expansion in F23 could be pushed back. In total, the expansion plans would increase Top
Glove’s annual production capacity to 41.3 bn pieces by end-FY11 from 33.8bn pieces currently. Total estimated
capex required for FY11 and FY12 is about RM80-RM100m p.a..

♦ Maintaining its 40% payout. As at Aug ‘10, Top Glove’s cash pile stood at RM303.1m (vs. RM185.8m as at Aug
‘09) while its net cash position grew further to RM299.5m (9.7 sen/share) as at end Aug ‘10, from RM165.3m (5.3
sen/share) as at end Aug ‘09. Top Glove declared a full-year net DPS of 16 sen (FY09: 11 sen), which translates to
a net payout ratio of 40.3%. Moving forward, management intends to maintain their 40% dividend payout policy
and would prefer to conserve cash in case of future M&A opportunities. Management added that the current
tougher operating landscape could open up opportunities for industry consolidation as less competitive players
(e.g. smaller manufacturers) exit the industry. While management said they have held “talks”, nothing concrete
has developed at this juncture.

Risks

♦ Risks to our view. The risks include: 1) sharp drop in raw material (latex) and/or energy (natural gas) prices,
which may result in margin expansion; 2) an appreciating US$ against the RM; 3) execution risk from capacity
expansion; and 4) stronger-than-expected results from overseas operations.

Forecasts

♦ No change to our net profit forecasts. We have left our FY11-13 earnings forecasts unchanged for now

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Valuations and Recommendation

♦ Investment case. Our fair value is maintained at 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 slowdown in orders for
rubber gloves as latex prices remains high and weaker US$. No change to our Underperform call on the stock.

Table 2: Earnings Forecasts Table 3: 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
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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.

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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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actions of third parties in this respect.

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