By Stephanie Jacob
UOB KayHian has downgraded Top Glove Corp Bhd to “hold” despite the fact it recently announced a record high quarterly profit for the first quarter of financial year 2016 (1Q16). This is because it believes the glove maker’s share price is fully valued and its current valuations have largely reflected most of the near-term positive catalysts.
Nonetheless, Top Glove still remains its top pick for the sector for exposure to the glove sector based on the significant progress that it has achieved in the nitrile glove segment and its higher nett profit when compared to its local rivals Kossan Rubber Industries Bhd and Hartalega Holdings Bhd.
The research house also said that Top Glove’s valuation of 20x financial year 2017 forecast (FY17F) price-earnings (PE) is relatively cheaper versus that of Kossan which has a 21x PE and Hartalega which has a 28x PE.
UOB KayHian has an unchanged target price of RM12.30 and a RM12 entry price for Top Glove. It has also left its earnings forecast unchanged as it believes that continuous quality improvement and research and design (R&D) initiatives will help sustain the glove maker’s margins at 16% to 18%, which it said is a healthy level.
It noted that ongoing R&D initiatives had expanded Top Glove’s product range, saying “the group is now capable of producing lighter-weight gloves of comparable quality to Hartalega and Kossan”. The higher quality products will help Top Glove bridge the gap with its competitor Hartalega, said the research house.
As for the oversupply concerns which are expected over the next two quarters, UOB KayHian noted that Top Glove’s management believes that the excess supply will be easily absorbed by the market within two to three quarters.
As at the noon bell on Bursa Malaysia, Top Glove was trading up by 2 sen at RM13.90.
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