Top Glove Corp Bhd
(Jan 9, RM4.62)
Maintain buy with a target price (TP) of RM5.41: With the current plant expansions, Top Glove expects to be able to cater for more orders, thus increasing its total sales volume for financial year 2015 ending August (FY15).

This is essential in order to support revenue growth, which is highly dependent on its volume growth as the average selling price (ASP) is currently low due to the depressed raw material prices.

Top Glove currently has 25 glove factories with a total capacity of 42.6 billion pieces per annum. Factory 29 is expected to be completed by the end of this month and will add an additional two billion pieces per annum, translating into a total capacity of 44.6 billion pieces per annum in FY15.

For the first quarter of FY15 higher demand was reported from Asia, growing by four percentage points (ppts) year-on-year (y-o-y).

This was mainly driven by higher demand from Japan for cast polyethylene (CPE) and thermoplastic elastomer (TPE) gloves, which are used mainly in food processing.

Japan reduced its purchases of these types of gloves from China in favour of those from Malaysia (for reasons not disclosed) and Top Glove has been the biggest beneficiary of this. Besides Asia, African countries have also increased by two ppts y-o-y.

Top Glove’s current global market share is 25%. This is a mixed weighted average from its market share of natural rubber and nitrile rubber gloves.

Currently, Top Glove commands up to 18% share in the nitrile rubber glove market, and more than 30% share in natural rubber gloves.

In 2020, the group expects to increase its nitrile rubber glove market share to 25% while maintaining its high natural rubber glove market share to achieve a total global market share of 30%.

As mentioned in its previous briefing, the group indicated again that it is still in talks for possible mergers and acquisitions (M&A) in FY15.

Although the company has not disclosed any information regarding M&A, we suspect that possible targets include small- to mid-sized local nitrile glove manufacturers or American/European distribution firms.

This would increase Top Glove’s product offerings and also deepen its control over the international supply chain.

We opine that M&A at this juncture would be value accretive and could be a turning point for its sluggish stock price performance.

Top Glove could also create more inroads into new markets in Asia, America and Europe via its nitrile glove capacity expansions.

We maintain our “buy” recommendation on the stock with an unchanged target price (TP) of RM5.41 per share. Our valuation is based on a 2015 price-earnings ratio (PER) of 16 times 2015 earnings per share of 33.8sen. Our target multiple is equivalent to the rolling four quarter historical PER of the company. — MIDF Research, Jan 9

This article first appeared in The Edge Financial Daily, on January 12, 2015.