CIMB Equities Research is maintaining its Hold recommendation on Top Glove and prefers Kossan which is its top pick in the glove manufacturing sector.
It said on Friday Top Glove’s earnings growth will continue to be under pressure due to its high capacity of natural rubber gloves, the demand for which is weak.
“We believe that the company has to reduce its selling prices in order to retain its customers in the natural rubber segment. While its nitrile capacity utilisation rate is high and a higher sales contribution from nitrile could partially buffer the impact of the weaker demand for natural rubber, nitrile gloves currently are also facing pricing pressures due to the higher nitrile capacity available in the industry,” it said.
CIMB Research said if the government increases the natural gas and electricity tariffs, Top Glove will have trouble passing on the higher costs to its customers, which will hurt its margins further.
While the company has almost completed its automation process and the new plants which are equipped with highly efficient production lines will help to increase margins, the high proportion of the older machines will drag down the overall positive impact as the company has not been able to make significant changes to the older machines.
“Despite the poorer prospects of the company, we maintain our Hold recommendation on the stock as the share price has declined substantially by 7.3% over the past three days,” it said.
CIMB Research said Top Glove’s earnings in the first half ended Jan 31, 2014 came in below its (44% of full-year forecast) and consensus expectations (40%).
The poorer-than-expected results were due to the intense competition within the industry which dragged down its margin. Top Glove was also impacted by the weaker demand for natural rubber gloves.
“Given the lower-than-expected results, we cut our FY14-16 earnings forecasts by 7%-9% which also lowers our target price, based on an unchanged 16.1 times CY15 target market P/E.
“Despite the poor results and our belief that its growth will continue to be under pressure due to its large natural rubber capacity, we maintain our Hold rating given that its share price has fallen by 7.3% over the past three days. We prefer Kossan which is our top pick in the sector,” it said.
Source: The Star Online
Published: 17 Mar 2014