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Wednesday, March 9, 2016

Brokers Report: Top Glove - The Biggest Now Growing Bigger



Re-initiate coverage with BUY call and target price of RM6.12

Top Glove

Top Glove Corporation Berhad (TOPG), the world’s largest rubber glove manufacturer is principally engaged in the manufacturing of multi-variety rubber examination gloves including medical and non-medical gloves. Under Tan Sri Dr Lim Wee Chai stewardship, TOPG which was founded in 1991 and based in Klang Selangor, started with initial 3 production lines under a single factory. Today, TOPG has expanded into 484 production lines housed in 27 factories with 45 billion gloves capacity per annum, commanding 25% of global market share, spanning over 195 countries. We reinitiate coverage on TOPG with BUY call and target price of RM6.12 based on 20% discount to a 3-year average PER, with resultant PER of 15x, pegged to FY17 EPS of 40.5 sen.

Investment Highlights:

i. Export of Rubber Glove Seen Double-digit Growth. 

The world’s export of rubber gloves in 1Q 2015 has increased to 13.5 billion pieces, registering +20% y-o-y growth from 11.3 billion in 1Q 2014. >90% of the increment was attributed by medical gloves including examination, surgical and high risk gloves. Equipped with world’s largest production capacity in medical glove manufacturing, Top Glove is regarded as one of the biggest beneficiaries to the robust growth in the export of rubber gloves. 

ii. Bigger Chip in Nitrile Glove Segment. 

We expect TOPG’s synthetic rubber (SR) glove production mix to increase to 32%, 36%, 40% of total glove production in FY16/17/18 or 11/15/17 billion pieces/annum respectively, in line with the demand shift from natural rubber (NR) gloves to SR gloves shown in Chart 3. To achieve higher economies of scale, Top Glove the already largest rubber glove maker in the world, is still rolling out expansion plans to boost its NR capacity (+1.4 billion) and SR capacity (+6.4 billion) by 4Q CY16 and 2Q CY17, respectively. This will see a total of 26 glove factories equipped with 540 production lines with production capacity of 52.4 billion gloves per annum. Comprehensive variety of glove products enables TOPG to tap into several industries other than healthcare namely semiconductor, aerospace, automotive, beauty, etc. The company is aiming to lift its global market share from 25% to 30% by 2020.

iii. Sound Earnings Record. 

TOPG has been consistently recording >RM 2 billion turnover in the last 5 years amid speculation of oversupply issue. Its PBT has been above RM200 million mark since 2012 and touched a new record high of RM364 million in 2015, translating into PBT margin of 14.5%. Consistently high profitability over the years has resulted in substantial RM1.2 billion retained earnings (pre-1:1 bonus issue in January 2016) boosting the group’s war chest. TOPG has been sitting on net cash position since FY09, with RM180 million cash and marketable securities ready by FY15. 

iv. Selected Risk Factors. 

1) rebound in latex price; 

2) strengthening in crude oil prices; 

3) increasing competitive landscape ; 

4) volatility in forex & raw material prices. 

v. Earnings Outlook. 

Moving forward, we expect full contribution of F27 (Lukut Plant with 2 billion capacity ; SR-centric) and F6 (Phuket plant with 1.4 billion capacity ; NR-centric) to be reflected in FY17 while F30 (Klang Plant with 4.4 billion capacity ; SR-centric) is expected to contribute positively and progressively into FY17-FY18 earnings. Provided no further delays in plant construction and facility installation and consistently strong demand of gloves, F30 should be fully commissioned by 4Q FY17, ramping up total capacity to 52.4 billion p.a. with 520 production lines. We project TOPG to post FY15-18 net profit CAGR of 21.3% driven by its ongoing expansion plans, converting into EPS of 64 sen, 81 sen and 80 sen in FY16/17/18, respectively. 

vi. Valuations & Recommendation. We expect the ASP of SR gloves will trend lower in the coming future as most major glove players have been ramping up its production capacity to fetch demand for SR segment. However, we are not perturbed by potential threat to margin erosion due to lower ASP as TOPG has the world’s largest production capacity that generates substantial economies of scale, translating into strength to weather the storm of price competition. We reinitiate coverage on Top Glove with a target price of RM6.12, based on the 20% discount to TOPG’s 3-year PER with a resultant PER of 15x pegged to FY17 EPS of 40.5 sen, suggesting a BUY recommendation, equating to approximately 25% upside potential from the current price of RM4.91.

Source: M&A Securities Research, 09 March 2016 

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