Top Glove : Higher earnings on continued recovery in margin BUY
We are upgrading Top Glove Corp (Top Glove) from HOLD to a BUY, with higher fair value of RM5.60/share after rolling forward our base year to FY10F and pegging it to a higher PE of 11x. For six months ended February 2009, Top Glove increased its net profit by 19% to RM70mil. This was in line with our and consensus estimates of RM130mil and RM132mil, respectively. Strong performance was mainly attributed to lower input costs namely latex and crude oil prices, as well as a favourable US$: RM exchange rate. Subsequently, EBITDA margin for 1HFY09 improved +3.6ppts YoY to 19%. Consistent with previous years, no interim dividend was declared in 2QFY09. We are keeping our FY09-11F dividend outlook with 2%-3% yield, assuming a 25%-26% payout ratio. Given Top Glove’s consistent track record, healthy fundamentals
and prospects of sustained earnings growth, we think the stock warrants a higher valuation. We have hence pegged the stock to a PE of 11x, which is at the lower end of its historical 8-year PE band of 6-32x. Stock offers a 17% total return, including 3% dividend yield (FY10F).
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