Top Glove on CIMB Research’s Add list

KUALA LUMPUR: CIMB Equities Research is maintaining its Add recommendation for Top Glove Corporation with strong demand and a stronger US dollar/ringgit as the potential re-rating catalysts. 

It said on Monday Top Glove remains optimistic on its performance going forward and it aims to embark on M&As to grow its business further.

“The group believes that it should be able to sustain the strong results in 2Q due to the strong demand, stronger US$ against RM and new capacity contribution.

“We maintain our earnings forecasts and target price which is based on 16.8 times CY16 price-to-earnings (P/E) which is a 20% discount to Hartalega,” it said.

CIMB Research said last Friday Top Glove chairman Tan Sri Lim Wee Chai and executive director Lim Cheong Guan made a presentation to around 50 fund managers during the Invest Malaysia conference last Friday.

“The company indicated that the demand for nitrile and natural rubber gloves is still strong, rising by double digits on-year.

“Given the strong demand, Top Glove thinks that it should be able to sustain the robust margin of 15.7% in 1HFY15,” it said.

The research house pointed out that despite keen competition, the strong demand coupled with its relatively lower selling prices indicate that the company could enjoy more of the benefits of the stronger US$ in the short term.

“While Top Glove reported solid 1H15 results with core net profit increasing by 22.6% on-year, Top Glove is targeting for stronger 2H15 results due to contribution from the new capacity,” it said.

Top Glove added 1.6 billion pieces per annum new capacity in February 2015, of which the impact will be felt more in 3Q. Other expansions in the pipeline are adding 1.8 billion by December 2015, 1.4 billion by July 2016 and 4.4 billion by September 2016.

Top Glove expects rubber prices to trend upwards as the current prices are very low.

“We believe that the worst is over for the company. In the past two years, it has been building new plants, installing new machines, revamping its old machines and improving its automation, all of which have enabled the group to secure more new orders from big customers.

“It has also shifted its focus to producing nitrile gloves, as demand for nitrile gloves is on the rise. In addition, its China operation has also turned around,” said CIMB Research.