Top Glove Corporation - A temporary setback

QFY8/14 was below expectations due to increased competition and forex loss.
Expect better quarters ahead on cost management efforts.
Stock remains a BUY but TP is lowered to MYR6.00 (-3%).

What’s New

2QFY8/14 core net profit of MYR40m (-19% QoQ, -22% YoY), brought 1HFY8/14 net profit to MYR90m (-4% YoY) and made up 42% and 40% of our and consensus’ full-year forecasts.
The weaker 2Q earnings were due to: (i) competition in the latex and nitrile segments, which led to softer sales volume (-7% QoQ, - 1% YoY) and compressed EBITDA margin (-1.2-ppt QoQ, -1.2-ppt YoY); (ii) MYR5m loss from its China vinyl operation owing to some one-off expenses in relation to the ceasing of its plant operations; and (iii) a realised forex loss of MYR8m as forward contracted rates were below that of spot when the goods were delivered.

What’s Our View

We expect better earnings in 2HFY8/14 as: (i) competition-led margin pressure will be mitigated by its cost reduction drive (i.e. plant automation, SAP system); (ii) the China operation would break-even/turn profitable within six months after the relocation of its plant; (iii) zero forex loss as the locked-in rate is similar to the prevailing rates; and (iv) marginal earnings enhancement from the full consolidation of its MediFlex’s earnings from 3QFY8/14.
We lower our FY14-16 EPS estimates by 12%/14%/14% as we lower our sales volume growth assumptions to 6%/10%/11% (from 10%/13%/12%) and also shave our margin assumptions by 1-ppt for FY14-16 in view of the competition. Though earnings forecasts are lowered substantially, our TP is only lowered by 3% to MYR6.00 as we roll forward our valuation to 2015 with on unchanged 17x PER.
Source: Maybank Research - 21 Mar 2014