Top Glove Corporation Bhd’s weaker than expected sales volume growth is seen to have been largely priced in by the market and RHB Research has upgraded it to “buy” call from “neutral”, with an unchanged target price of RM5.67.
The stock closed RM4.72 yesterday, up 1 sen with some 980,000 shares traded.
The research house in a note yesterday said that the stock is now trading at an implied 14x one-year forward price-to-earnings ratio (P/E), below its historical five-year average P/E of 17x.
“Top Glove deserves to trade at its historical average trading band because of its solid management team and healthy balance sheet,” it said.
Top Glove’s share price has retraced by about 23% since the downgrade by RHB Research in Oct 2013.
Management guided that the expansion of its existing plant, namely Factory 27 in Lukut, Port Dickson, is on track for completion by May, while the construction of a new factory (Factory 29) in Klang is targeted to be completion by December.
Factory 27 will add another 600 million pieces of nitrile gloves while Factory 29 will produce 1.6 billion pieces nitrile gloves. This will bring its total installed production capacity to 43.5 billion pieces by end-2014, which in turn will lift the nitrile product mix to 27% from 23% currently.
The company has set a target for a more balanced product mix portfolio with nitrile and natural rubber gloves to account for 50% each.
On the possible impact from natural gas price hike, management guided that this could increase total production costs by approximately 1.4%, which translates into more than RM1.0 million a month.
However, management stated that the increase in costs can easily be passed on to customers by a revision of 1% to 1.5% in average selling prices of its gloves. Note that energy only comprises 5% to 6% of its total production costs.
Gas Malaysia had earlier announced an average increase in natural gas prices of around 20% for industrial consumers like rubber glove manufacturers
RHB Research expects Top Glove’s vinyl gloves division to record losses of RM5.2 million in 1QFY14 and RM5.4 million in 2QFY14, due to the scaling back of China operation.
However, its China plants have started contributed positively in March, thanks to higher utilization rate of 70% to 80%, and management expects this trend to continue and will focus on expanding its market presence in China.
Overall, RHB Research believes market demand for gloves to remain strong and robust, with an annual growth rate of 8% to 10% in the coming years, attributed by natural organic growth from matured markets like the US and EU.
“Given easing raw material prices, we also expect demand for natural rubber gloves to remain solid and chalk up positive sales growth,” it added.