Wednesday, October 19, 2011

CIMB Research maintains Sell on Top Glove

KUALA LUMPUR: CIMB Equities Research maintains its Sell rating on Top Glove Corp, earnings outlook and RM3.29 target, based on a 13.05 times forward price-to-earnings.

It said on Wednesday, Oct 19 that capacity glut continues to overhang the glove sector and it could take two to three years to absorb the excess supply.

'Although Top Glove's earnings have probably bottomed, consensus numbers imply an unachievable 49% on-quarter rise in net profit,' it said.

CIMB Research said that consensus earnings downgrades will follow. Though a turnaround is near, the share price is still ahead of its fundamentals, it added.

'We do not concur with the upbeat view on natural rubber (NR) latex price that was voiced during the surprisingly well-attended briefing. Top Glove indicated that NR latex prices could fall to RM7 a kg in three to six'' months, which we view as unlikely since rubber trees are approaching the wintering period (February to April) when natural rubber production halves,' it sadid.

The research house said even though Top Glove is deferring capacity of 1.2 billion pieces per annum'' by seven months, overcapacity is still an issue. Top Glove thinks that industry supply exceeds demand by 10-20%. Assuming demand growth of 8%-10% per annum, it could take two to three years for demand to catch up with supply.

'Though a stronger ringgit is positive, we gathered that Top Glove probably booked a forex loss in September as receivables were locked in at the Augiust 2011 rate of RM2.95-RM3.10,' it said.

CIMB Research said despite Malaysia's gas shortage, Top Glove's capacity expansion of 6.3 billion pieces by May 2012 will not be affected. The company will use biomass as fuel, reducing its dependence on subsidised gas.

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