Glovemakers surge on upbeat reports on Top Glove

Glovemakers surge on upbeat reports on Top Glove

Tags: Adventa Bhd | AmResearch Sdn Bhd | Glovemakers | Hartalega Holdings Bhd | Kossan Rubber Industries Bhd | Latexx Partners Bhd | Maybank IB | Maybank Investment Bank Bhd | Supermax Corporation Bhd | Top Glove Corporation Bhd

Written by Surin Murugiah
Tuesday, 06 October 2009 23:18

KUALA LUMPUR: Glovemakers advanced today after analysts issued upbeat reports on TOP GLOVE CORPORATION BHD [] ahead of the release of the company's fourth quarter (4Q) results scheduled for Thursday, and on the outlook for the rubber glove sector.

AmResearch Sdn Bhd said that the demand outlook for rubber gloves remained intact at a healthy 8% to 10% growth per annum, adding that the (A)H1N1-related buying was estimated to have spurred global demand by an additional 14 billion to 15 billion pieces, on top of the 11 billion to 17 billion pieces from organic growth.

Top Glove surged to its highest level since Aug 2, 2007, today, jumping 5.5% or 41 sen to RM7.87, after Maybank Investment Bank Bhd (Maybank IB) and AmResearch both maintained their buy calls on the stock at RM7.46, with the former saying the company's 4Q09 results were expected to beat street estimates.

KOSSAN RUBBER INDUSTRIES BHD [] gained 3.22% or 14 sen to RM4.49, its highest close since Sept 28, 2007.

Meanwhile, LATEXX PARTNERS BHD [] jumped 7.14% or 15 sen to RM2.25; SUPERMAX CORPORATION BHD [] up 3.85% or 10 sen to RM2.70; ADVENTA BHD [] up 3.70% or 6 sen to RM1.68 while HARTALEGA HOLDINGS BHD [] added 2.52% or 13 sen to RM5.29.

Maybank IB said Top Glove's 4Q09 results should meet the research house's expectations, but above consensus while dividends may surprise.

"We continue to like Top Glove's commanding market leadership in the sector, earnings growth potential and solid balance sheet," said Maybank IB, which maintained its target price for the stock at RM8.30.

The research house said Top Glove's 4Q net profit could reach RM55 million to RM56 million, which would bring its full-year net profit to RM166 million to RM167 million, in line with its own but above street estimates of RM154 million.

"Growth drivers would come from the surge in orders (+10%-20% quarter-on-quarter) and expansion in earnings before interest and tax (Ebit) margins (+3%-4% q-o-q), capitalising on the (A)H1N1 flu outbreak whilst making headway into the Latin America market (Brazil and Argentina).

"Furthermore, a lower interest expense following the retirement of RM70 million in debt and cost savings from lower input costs were not fully passed on to customers. Latex cost, 52% of its operational expenditure, fell 14% q-o-q to RM3.80 per kg in June-August," it said.

The research house also said Top Glove's net cash position was believed to have grown for the fourth consecutive quarter, improving by about 40% q-o-q.

"With a higher cash pile, Top Glove may surprise with a higher dividend payout (FY08: 30%).

"Assuming a 40% payout (22 sen dividend per share), this will entail a dividend of 15 sen per share (+150% year-on-year) in 4Q. Top Glove had paid a 7 sen interim dividend year-to-date," it said.

Meanwhile, AmResearch raised its fair value for Top Glove to RM8.45 from RM8.30, and said it had raised its FY09-11 earnings forecast for the company by 2% to 8%.

It said the growth would be underpinned by slightly higher revenue growth from prospects of higher recurring orders coming mainly from sales of basic powdered gloves to Latin American countries, and better-than-expected sustainable margin going forward due to higher average selling prices and lower overall cost structures. "As such, we have increased our FY10F and FY11F dividend forecasts to 18 and 19 sen per share, respectively, premised on a 30% dividend payout.

"We are however, keeping our forecast of 15 sen per share for FY09F, but would not be surprised if management were to choose to reward shareholders. The group is in a strong net cash position with cash holdings of RM173 million as at 9MFY09," it said.

AmResearch said that Top Glove's expansion to boost installed capacity by about 10% to 34.5 billion pieces of gloves per annum from an additional 32 production lines by end-FY10F was on schedule.

It said the company's Factory 20 was set for completion by February 2010 and Factory 21 by July 2010.

"Though the stock has outperformed the FBM KLCI by 51% on a relative basis year-to-date, valuation is still undemanding as it is still valued below its historical 9-year average of 15 times.

"We reiterate our buy on the group's proven earnings deliverance backed by solid fundamentals, market share dominance in the industry, as well as better trading liquidity," it said, adding that the fair value of RM8.45 offered 18% upside potential.