KUALA LUMPUR: Hwang DBS Vickers Research upgraded Top Glove to Hold (from Fully Valued) and raised its target price to RM5.30 (from RM4.60) based on 13 times PE, after rolling forward our valuation base to CY12.
The research house said on Thursday, March 17 the key re-rating catalyst for the stock is a recovery in margins and earnings.
HDBSVR said the glove maker's 2QFY11 net profit of RM25.4m (-30% qoq; -64% yoy) was below its and market expectations.
'1HFY11 net profit of RM61.5m is only 31% of our full year forecast. The weak result was mainly due to (i) high latex prices (+29% qoq); (ii) continued weakening of USD vs the ringgit (-2% qoq); and (iii) flat demand.
'The company also took a longer time to pass on the higher costs to customers. Revenue edged down 1% qoq vs 9% drop in 1QFY11, while EBIT margin fell to 6.4% against 1Q's 9%. No dividend was declared for the quarter,' it said.
HDBSVR said post-2QFY11 results, it cut FY11F earnings by 10% and raised FY12-13F earnings marginally.
'We expect margins and earnings to recover in 2H FY11,' it said.
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Firstly, restocking activities should pick up pace, following minimum orders in the last two quarters.
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Secondly, margin pressure should ease as latex prices fall. Latex prices had tumbled from RM10.90/kg on 22 Feb to RM8.56 (-21%) on March 15.
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Thirdly, a more balanced product mix would enable the company to weather volatile raw material costs.
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'Top Glove has effectively raised nitrile gloves production share from 7% in 1Q to 11% in 2Q, and is targeting 15% by end 2011,' it said.
The research house said on Thursday, March 17 the key re-rating catalyst for the stock is a recovery in margins and earnings.
HDBSVR said the glove maker's 2QFY11 net profit of RM25.4m (-30% qoq; -64% yoy) was below its and market expectations.
'1HFY11 net profit of RM61.5m is only 31% of our full year forecast. The weak result was mainly due to (i) high latex prices (+29% qoq); (ii) continued weakening of USD vs the ringgit (-2% qoq); and (iii) flat demand.
'The company also took a longer time to pass on the higher costs to customers. Revenue edged down 1% qoq vs 9% drop in 1QFY11, while EBIT margin fell to 6.4% against 1Q's 9%. No dividend was declared for the quarter,' it said.
HDBSVR said post-2QFY11 results, it cut FY11F earnings by 10% and raised FY12-13F earnings marginally.
'We expect margins and earnings to recover in 2H FY11,' it said.
''
Firstly, restocking activities should pick up pace, following minimum orders in the last two quarters.
''
Secondly, margin pressure should ease as latex prices fall. Latex prices had tumbled from RM10.90/kg on 22 Feb to RM8.56 (-21%) on March 15.
''
Thirdly, a more balanced product mix would enable the company to weather volatile raw material costs.
''
'Top Glove has effectively raised nitrile gloves production share from 7% in 1Q to 11% in 2Q, and is targeting 15% by end 2011,' it said.
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