16 December 2009 Top Glove : 1Q10 earnings could exceed expectations Outperform

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Top Glove is expected to announce its 1Q results later this evening. We believe results could surprise on the upside largely on stronger-than-expected margins, which managed to remain resilient despite qoq despite higher latex cost and weakening US$.
Qoq, we expect topline growth of around 10-15% on the back of upward adjustments made to selling prices (17.1% qoq), that more than covered the increase in latex cost (+19.4% qoq) as well as weakening US$ (-2.8% qoq). All-in, 1Q earnings could rise by around 10-13% qoq.
Commercial production for 16 new lines at F20 is on track to start commercial production in Feb ’10 while construction for F21 has started with commercial production expected to start by Jul ’10. Due to the high take-up rate for its gloves, Top Glove intends to put an additional 8 new lines at F18 with commercial production expected to start by Jul ’10. All in, Top Glove’s annual production capacity is expected to reach 35.3bn pieces by end-FY10, from 31.5bn pieces currently.
We are keeping our fair value of RM9.50 pending the release of the results. No change to Outperform call.