POSITIVE OUTLOOK: Photo shows a Top Glove production line. Yap believes the worst is over for Top Glove as it is expected to benefit from the decline in the price of natural rubber latex, which is used in about 80 per cent of its product mix.
KUCHING: Top Glove Corporation Bhd (Top Glove) is forecasted to see better quarterly results in the future as the company’s first quarter of financial year 2012 (1QFY12) yielded ‘flattish’ results due to unfavourable foreign exchange (forex) rates and the lower glove prices.
Top Glove’s 1QFY12 results with revenue of RM554.8 million fell short consensus estimates, with its net profit of RM31.4 million higher quarter-on-quarter (q-o-q), owing to the time lag in passing that quarter’s lower latex costs to its customers.
However, on a year-on-year (y-o-y) comparison, its first quarter net profit was still lower in view of the weaker demand and hence, only about 70 per cent of costs were being passed onto customers.
OSK Research Sdn Bhd (OSK Research) analyst Jason Yap remarked, “In fact, its net profit could have been even higher, if not because of a forex loss of RM13.3 million being recognised in 1QFY12.
“Nevertheless, we believe the worst is over for Top Glove as it is expected to benefit from the decline in the price of natural rubber latex, which is used in about 80 per cent of its product mix.
“The price of natural rubber latex has been on a downtrend, in spite of the rainy season and the fast approaching wintering season which starts in January 2012 – both of which could curtail supply,” he stated.
Yap opined that the price decline was good for Top Glove, considering that this played a huge role in lowering its current latex cost component to probably less than 65 per cent of its total cost for producing natural rubber gloves.
Lower latex prices were expected to boost Top Glove’s sales volume further via the ‘cannibalisation’ of its competitors’ nitrile glove segment, given that natural rubber gloves – on top of being a substitute for nitrile gloves – could also be sold at cheaper prices without sacrificing profit margins.
HwangDBS Vickers Research Sdn Bhd (HwangDBS Research) analyst Hon Seow Mee observed that latex prices fell 11 per cent q-o-q and lifted operating margin or earnings before interest and tax (EBIT) to 7.5 per cent from 6.4 per cent a quarter ago.
Capacity utilisation was mixed with powder-free and nitrile lines running at 90 per cent, while powdered lines at 70 per cent and vinyl at 30 per cent.
Latex prices remained volatile despite trending lower with prices moving between RM6.50 to 6.90 per kilogramme (kg) in the last month.
“We maintain our FY12 latex price assumption at RM8.30 per kg, as latex production is expected to be lower during the wintering season from February to May coupled with pent up demand from car manufacturers could reverse the downtrend.
“We expect Top Glove to see better earnings in the subsequent quarters. The key risk to our forecast is higher costs savings passed to customers,” Hon stated.
Kenanga Investment Bank Bhd (Kenanga Investment) stated that in order to mitigate latex cost increases in the future, Top Glove started venturing into the upstream business by acquiring a piece of land with a total area of about 10,000 hectares for its rubber plantation in Cambodia.
Total capital expenditure (including land, planting and facilities) for the project was expected to cost RM160 million, spread over a planting period of six years.
With an estimated yield per annum of 4.2 tonnes per hectare, this would generate between 15 to 20 per cent of Top Glove’s current annual latex consumption, according to Kenaga Investment’s estimates.
The research house maintained earnings forecasts for FY12 and FY13 and kept Top Glove’s target price unchanged at RM3.74 per share, based on 17.7 times FY12 earnings per share.
Hon imputed margin recovery for HwangDBS Research’s FY12 forecasts for the company, assuming 10 per cent EBIT margin. The derived target price of RM4.05 per share was based on 13 times 2012 price earnings.
Despite a number of near-term setbacks, OSK Research’s Yap increased Top Glove’s fair value to RM4.52 per share (from RM4 per share previously), based on the existing price earnings ratio of 17 times.