HDBSVR: Top Glove Corporation, Buy (Initiating Coverage)

Top Glove Corporation: Size matters

-Story: As the largest rubber glove manufacturer in the world, commanding 24% of global market share, Top Glove is set to capitalise on an expected 10% yearly surge in demand for rubber gloves, to be propelled by a growing, ageing world population and consequential increase in healthcare expenditure. Its aggressive expansion plan will culminate by end-FY09 and enable it to capture this rising trend of rubber glove use. We expect a strong CAGR of 21% from FY07-10, due to increased capacity and anticipation of higher economies of scale following expansion of the plants.

-Point: We believe Top Glove has been unfairly treated by the recent equity market rout, as its fundamentals have remained robust, and bolstered by the recent set of satisfactory 2Q08 results. Top Glove managed to register a 16.2% jump y-o-y in net profit despite the triple whammy facing the local rubber glove industry, of rising latex and fuel costs, and a depreciating USD. The strong results indicate Top Glove's ability to pass on the bulk of increase in costs.

-Relevance: We initiate coverage on Top Glove with a BUY call and target price of RM6.00 apiece by pegging a P/E of 11x on CY09 EPS, which is at the lower end of the 1-year historical forward PE band of 8x-16x, or an implied 50% premium to the sector average PE of 7.2x. We believe the premium is justified, given Top Glove's liquidity (its market cap is 20% larger than that of its closest local peers combined). Top Glove is also trading at an attractive PE of 10x against its CY07-10 EPS CAGR of 21%.