TOPGLOV (7113) - Top Glove - A Long-term Player

We had a meeting with Top Glove (TopG)’s management yesterday and visited Factory 25 (F25), with positive views on the prospects and ongoing operations of the Group. Key takeaways include the Group’s sustainable growth drivers of internal efficiencies coupled with favourable external factors, such as strengthening of the US Dollar and softer raw material prices. To better capture the Group’s long-term potential, we are revising our valuation methodology from discounted dividend model to discounted cash flow to equity (DCF). We are maintaining our Neutral call but with a higher TP of RM15.26. We believe TopG’s future expansion plans have been fully priced-in with its share price rallying c.200% YoY.

• F25 visit. Producing 2.4bn/annum of nitrile gloves, the factory is running at a line speed of 35,000 pcs/ hour. The current utilisation rate is about 85%-90%. The lines include a double-dipping process which will further enhance the quality by minimizing pinholes on the gloves.
  
• Internal mould supply. TopG has invested less than RM20m to set up its own mould manufacturing facility. We understand that the manufacturing plant will be rolled out in two phases with 1.4bn units/yr total capacity, which accounts for c.50% of the group’s current total requirement. The first phase is expected to commence in April. With its internal mould supply, the Group is estimated to save about 15% of its total mould costs, and can control the product quality with the aim to extend its useful life.
  
• Updates. The Group will add another 6.2bn pcs of SR gloves and 1.4bn pcs NR gloves in the next 13 months. Management is also aiming to add 2 factories/yr (which should translate to an additional 4-5bn pcs of gloves) should demand continues to expand. Its product mix target is 60:40 of NR:SR (current: 68:32). We assume its product mix would change to 63:37 and 60:40 for FY16 and FY17 respectively. TopG continues to lookout for M&A deals within the glove sector that would complement its existing business. Referring back to 2012 announcement on the Group’s interest to venture into upstream rubber plantation. Due to the current oversupply of natural rubber commodity and softer latex prices, the Group has put on hold those plans and is possibly looking to dispose its plantation land.
• Maintain Neutral. We have revised our valuation methodology to DCF, with a TP of RM15.26 to better capture the group’s long-term potential. Adjusting to TopG’s current utilisation rate and glove demand, we have raised its utilisation rate from 76% to 78% for FY16F-FY18F. Our estimates are conservative, having assumed for higher costs. Consequently, our profit forecasts are lowered by 8.6%-12.5% for FY16F-FY18F. We reiterate that growth has been fully priced-in despite favourable currency and raw material prices.

Source: PublicInvest Research - 13 Jan 2016

TOPGLOV (7113) - Top Glove - A Long-term Player
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