Friday, December 17, 2010

Top Glove earnings not a trend

KUALA LUMPUR: Analysts say the 44.7% decline in the earnings of Malaysia’s largest glove producer, Top Glove Corp Bhd, is not a sign of things to come for the other glove manufacturers.

According to analysts and industry players, the existing headwinds may indicate tougher times for Malaysian glove manufacturers, but not all earnings profiles are the same.The financial performance of manufacturers will hinge on their respective product mix and raw material cost structures, the analyts say. They add that based on historical numbers, Top Glove was the most affected among the six listed glove manufacturers in Malaysia due to its portfolio of mainly natural rubber or latex gloves.

“The others are less affected due to their different product mix comprising latex and nitrile gloves,” JF Apex Securities analyst Ng Keat Yung told The Edge Financial Daily yesterday.Other listed glove manufacturers in the country include Supermax Corp Bhd, Kossan Rubber Industries Bhd, Hartalega Holdings Bhd, Latexx Partners Bhd and Adventa Bhd.

Although volatility in commodity prices and the weakening US dollar will continue to impact the industry, we are optimistic that Top Glove will sustain its profitability. — Tan Sri Lim Wee ChaiAlthough Top Glove’s first quarter net profit and revenue which were released yesterday came in below analysts’ estimates, Ng said the results were not necessarily an indication of how other players will fare in the current environment of costlier latex and a weakening US dollar.“Glove players will have less bargaining power [to dictate prices] as there is no shortage of supply,” said Ng who is “underweight” on Top Glove but has a “neutral” call on others.

Demand for gloves will, however, still be there but not the “extra demand” seen during recent outbreaks of disease, Ng added.Top Glove is most exposed to the rising price of latex as some 90% of its revenue is from gloves made from latex. The other producers tend to have a larger proportion of nitrile gloves, which use synthetic rubber as their core raw material.A report by MIDF Amanah Investment Bank shows that nitrile gloves make up about 7% of Top Glove’s revenue. In contrast, nitrile glove sales make up 83% and 38% of the revenue of Hartalega and Kossan, respectively.

In a statement to Bursa Malaysia yesterday, Top Glove said its first quarter net profit fell in annual and quarterly terms as the world’s largest rubber glove producer incurred higher operating expenses. This comes against the backdrop of costlier natural rubber and a weakening US dollar which have squeezed its top and bottom lines.Its net profit declined 44.7% to RM36.05 million, or 5.83 sen a share in the quarter ended Nov 30, from RM65.21 million or 10.76 sen a share a year earlier. Operating expenses rose 16.3% while revenue was up 4.1% to RM491.5 million from RM472.3 million.

In quarterly terms, first quarter net profit fell 20% from RM45.06 million in the preceding fourth quarter while revenue was down 9.2% from RM541.39 million.“The first quarter just ended proved to be a challenging one for Top Glove. Although volatility in commodity prices, in particular latex prices, and the weakening US dollar will continue to impact the industry, we are optimistic that Top Glove will sustain its profitability,” Top Glove chairman Tan Sri Lim Wee Chai said in a statement accompanying the company’s latest numbers.The firm has a cash pile of RM346.95 milllion versus debt obligations of RM3.97 million, hence, a net cash position of RM342.98 million or 55 sen a share.

The company has an issued base of 618.3 million shares.Looking ahead, the company foresees normalisation of glove demand in the short term, but expects business to pick up in the long term. This will be helped by demand from emerging markets and the global healthcare industry.Apart from demand normalisation the manufacturer, capable of producing some 34 billion gloves annually, said the industry also had to contend with excess capacity. Another crucial concern is that buyers are opting to delay purchases and keep inventory at a minimum as they wait for glove prices to decline.“Nevertheless, this adverse situation will possibly lead to further consolidation among the industry players and Top Glove is in a good position to further enlarge its business when the opportunities arise,” the company said.

Top Glove plans to dedicate more production lines to manufacture synthetic rubber or nitrile gloves, which fetch higher margins and are not subject to the volatility in natural rubber prices. Synthetic rubber is made from butadiene, a by-product of crude oil.Top Glove’s first quarter revenue and net profit came in below JF Apex’s annualised numbers of RM2.35 billion and RM200 million, respectively, for the current financial year ending Aug 31, 2011.

Adapted: The Edge Financial Daily

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