STOCKSTALK | OCTOBER 26, 2015 7:30AM
Top Glove’s share price has rallied on the back of its stellar 4Q15 performance and its recent announcement to acquire at least one peer by next year. Rubber glove players are known to be beneficiaries of the weaker ringgit, but have cost
advantages not been fully priced in already?
Business model: Founded in 1991 as a modest business venture of one factory, three production lines and 100 staff, Top Glove Corp Bhd has since emerged as the world’s largest rubber glove manufacturer by production volume, commanding 25% of the world glove market share.
Listed on Bursa Malaysia’s Main Market since May 16, 2012, the group today owns and operates 27 manufacturing facilities in Malaysia, Thailand and China, with marketing presence in Malaysia, the US and Germany.
Headquartered in Setia Alam, Top Glove exports to over 195 countries with 2,000 clients worldwide. It employs 10,000 staff across a total of 484 production lines.
The utilisation rate of its plants stands between 75% and 80%, compared to other local rubber glove manufacturers Hartalega (87%) and Kossan (85%).
Export volumes for both natural rubber and synthetic rubber gloves have also been on an upward trajectory, paving way for growth in the sector.

One should, however, take note that in recent years, export volumes of the higher margin synthetic rubber have outpaced that of natural rubber (56:44 in first quarter of calendar year 2015 or 1QCY15), due to the increasing popularity and demand for the former in the US and the EU region.
Among its peers, Top Glove has the largest exposure to natural rubber gloves, which constitute more than 60% of its sales mix. Export volumes of the natural rubber variant, however, is expected to be supported by increasing demand from emerging markets such as Brazil and China.
Top Glove Corp Bhd’s pre-tax profit for financial year ended Aug 31, 2015 (FY15) rose to
RM363.68 million from RM216.31 million a year ago. Revenue for the said period rose to RM2.51 billion from RM2.28 billion previously.
The final quarter of 2015 saw net profit more than doubled to RM103.1 million from
RM46.3 million in the same quarter a year earlier, while revenue rose 22.5% to
RM709.4 million, benefitting from the weaker ringgit and raw material prices.
Setting its eyes on achieving global market share of 30% by 2020, Top Glove has recently announced that it is aiming to buy at least one peer next year to bolster its market share and earnings.
The company is reported to have the financial resources to carry out merger and acquisition, without saying how much it plans to spend. The company has allocated
RM200 million for capital expenditure for the next fiscal year, ending August 2016.
Shareholders and management: The company’s biggest shareholder is chairman and founder Lim Wee Chai, who holds 29.55% of its shares. Other major shareholders, according to the Bursa, are Firstway United Corp (5.17%), Northcape Capital Pte Ltd
(4.93%), MFP Capital Corp (3.57%), and JPMorgan Chase & Co (3.3%).
The group’s management is helmed by 55-year-old Lee Kim Meow, who has been serving as the group’s managing director since April 7, 2009, and joined the board as executive director since Oct 15, 2003.

Lee has vast experience in financial services as well as the trading and manufacturing business having worked more than 15 years in established financial institutions and with a well-known conglomerate with diversified interest in the Asean region.
He is a trustee of Top Glove Foundation, chairman of the Asean Rubber Gloves
Manufacturer Association since 2013, and board member of the Malaysian Rubber
Export Promotion Council since 2002.
Share price
performance: Top Glove’s share price has been rallying since the announcement of its results for FY15 on Oct 15, further catalysed by the news that it will acquire a peer in the rubber glove sector in the near to medium term.
Share price rose sharply to breach its 52-week high of RM9.55 on Oct 21.
Top Glove closed 2 sen lower at RM9.25 on Oct 23.
Top Glove recently also announced a one-for-one bonus issue, which would double its share base by 625 million shares to about 1.25 billion shares, anticipated to boost the stock’s liquidity and improve near-term trading sentiment.
Its management expects to complete the corporate exercise in the 1QCY16, following shareholders’ approval at the next annual general meeting on Jan 16.

What analysts think: For FY15, Top Glove recorded a historical high for both revenue which increased 10.3% year-on-year (y-o-y) to RM2.5 billion and earnings which grew
53.4% y-o-y to RM281.6 million.
The strong performance was attributed to a combination of internal and external factors, including increased volume sales that grew 8% y-o-y, improved efficiency, the turnaround of its Chinese operations, weaker raw material prices and the strengthening
US dollar against the ringgit.
Overall, analysts tracked by KINIBIZ are of the view that Top Glove performed tremendously, exceeding house and consensus expectations by more than 10% and are excited by its planned capacity expansions and acquisition exercises.
“Though weaker raw material prices and a stronger US dollar-to-ringgit exchange rate bodes well for the group, as per the industry norm, it had shared part of the gains and savings with its customers via lower average selling prices (ASPs), which decreased 7% y-o-y,” noted TA Securities.
The research house also pointed out that sales volume was driven by nitrile gloves, partially attributed to the new nitrile capacity stemming from its Factory 27 and Factory
29.
“Accordingly, we have seen a continued climb in the proportion of nitrile gloves sold to
28%, a reduction in the proportion of latex powdered gloves to 46%, and latex powder free gloves to 18%. We are positive on this observation as it diversifies the group’s heavy reliance on natural latex gloves,” said TA Securities in its report published on Oct 21.
The research house also earlier pointed out that the industry’s focus on the nitrile
(synthetic gloves) wave will continue to be the impetus to fuelling earnings growth for the industry in the near to medium term.
Data from Malaysian Rubber Export Promotion Council showed that exports of nitrile glove to the US in the first half of 2015 by Malaysia have been growing 38% y-o-y, compared to China (1.3%) and Thailand (-28.2%).
While nitrile glove demand is expected to outpace natural rubber glove demand,
AllianceDBS argued that natural rubber glove makers will be better positioned to

capture currency gains, as its nitrile counterparts will likely compete away the currency gains because of the need to deploy new capacities.
“We recommend investors accumulate Top Glove. Key potential rerating catalysts include sustainable margin expansion from the latest results and improving liquidity from the bonus issue,” said CIMB Research in its report published on Oct 20.
CIMB Research maintained its “add” rating on the stock with an unchanged RM9.80 target price, based on 18.5 times CY17 price-earnings (PE), which is still at a 20% discount to Hartalega’s target PE.
TA Securities revised upwards its target price to RM10.50 per share from RM9.70 previously, based on a PE of 20 times and CY16 earnings per share of 52.3 sen.
HLIB Research lifted its target price from RM9.49 to RM10.98 post-earnings upgrade.
“Our valuation is pegged to unchanged multiple of 20 times CY16 earnings per share based on +2 standard deviation above its three-year historical average PE similar to
Kossan. This is also in line with FY16 PE of Hartalega and Kossan,” explained the research house.
Earnings forecast:

Peer Comparison:
StockStalk: A beneficiary of the weakening ringgit, export-oriented glove stocks have seen their competitiveness propped up in the current market environment. Attesting to the sector’s resilience, the average beta of key rubber glove players is relatively low, currently standing at 0.5.
Investors should be able to take respite in the fact that Top Glove’s financial performance is not solely due to translation gains from a stronger performing US dollar, but also due to internal cost control measures. This is further supported by solid expansion plans to seek inorganic growth and increase market share, as well as cost control measures to further bolster group earnings.
While the fundamentals of most glove makers differ, Top Glove has majority of its costs denominated in the ringgit, while deriving its revenue in the greenback, hence it should continue to benefit from the current circumstances for as long as the US dollar-toringgit exchange rate sustains at current levels and the subdued environment for raw material prices persists.
Top Glove’s rising cash pile also provides scope for higher dividends, with potential upside in earnings. It is still not too late for investors to jump on the rubber glove bandwagon, as Top Glove’s valuation is generally still seen to be relatively cheaper than that of its peers.