KUALA LUMPUR: RHB Research Institute is maintaining its fair value for Top Glove Corp Bhd at RM4.10 based on unchanged target CY11 PER of 12.5 times.
“We believe the near-term outlook for Top Glove remains challenging given the longer time frame now required to pass on the higher cost and lower proportion of cost increase that can be passed on to its customers as demand for rubber gloves continues to remain weak,” it said on Wednesday, Jan 12.
RHB Research said there was no change to its Underperform call on the stock.
To recap, 1Q11 revenue rose 4.1% on-year on the back of the upward revision in selling prices to partially pass on the rising latex cost and weakening RM. 1Q11 net profit, however, fell 45% on-year due to margin contraction (EBITDA margin fell 9.5%-pts on-year) resulting from the time lag in passing on the higher latex cost and weakening US$.
During a briefing on Tuesday, RHB Research said Top Glove management mentioned that the time lag could continue for the next 1-2 quarters ahead as latex price is still at a high (currently at RM9.81/kg).
Although typically glove manufacturers are able to pass on the higher cost, the time lag for Top Glove to pass on the higher cost is now longer (currently 3-6 months, as compared to 1-2 months previously) as customers are less willing to absorb higher prices given the ample capacity available in the industry following the H1N1 pandemic last year.
Apart from the longer time lag, Top Glove is now only able to pass on a lower proportion of the cost increase to their customers (previously around 80% is passed on, as compared to 60% currently).
“Nevertheless, they opined that latex prices should start to ease in the next 3-4 quarters ahead as fresh new supply would be coming into the market from Malaysia, Cambodia and Vietnam and seasonality effects,” said RHB Research.
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