This article first appeared in The Edge Financial Daily, on October 22, 2015.
Top Glove Corp Bhd
(Oct 21, RM9.55)
Maintain buy with a higher target price of RM10.98 from RM9.49: We came back from Top Glove Corp financial year 2015 (FY15) briefing feeling positive due to its exciting prospects going forward.
We reiterate our views that Top Glove will continue to benefit from a favourable environment — both internal and external tailwinds.
We learned that its latest factory is currently able to produce 40,000 pieces per hour, narrowing its gap with Hartalega Holdings Bhd’s next generation integrated glove manufacturing complex of 45,000 pieces per hour.
In addition, annual glove production per employees has improved from 4.1 million pieces to 4.3 million pieces sequentially.
Its China operation recorded profit after tax of RM4.2 million in FY15, mainly achieved after it consolidated two factories into one. In FY14, the China operation recorded a RM9.8 million loss.
The management shared that its payout ratio for FY15 (44%) fell below its dividend policy of 50% after considering cash balances as well as its planned mergers and acquisitions exercise. It also indicated that its payout ratio for FY16 will be normalised to at least 50% of profit after tax and minority interests.
Product mix by sales has been trending upwards for nitrile gloves. We believe this will continue to be the case and Top Glove will continue to tap into nitrile glove segment.
Data from Malaysian Rubber Export Promotion Council shows that export of nitrile gloves to the United States in the first half of 2015 by Malaysia has been growing at 38% year-on-year compared to China and Thailand’s growth of 1.3% and decline of 28.2% respectively.
With the management’s confidence with planned capacity expansions and acquisition exercises, Top Glove will be able to command 30% global market share in 2020 from 25% currently.
Risks include further reduction in average selling price amid steep competition, surge in nitrile and latex prices, and a weaker US dollar against ringgit. — Hong Leong Investment Bank Research, Oct 21