Margins to improve on lower raw material costs
Top Glove Corp Bhd's profit margin was affected by rising raw material prices and the weakening US dollar in the early part of 2008. Despite the challenges, the company managed to improve its full-year earnings before interest, tax, depreciation and amortisation (ebitda) margins from 13.5% to 13.8%.
Now with the prices of latex declining and the US dollar appreciating, the company will be experiencing a reversal of fortunes. Thus, its margins are expected to improve slightly, at least, in the next quarter.
The company will also benefit from the lag effect of passing on the benefits of
lower raw material prices to customers.
That said, even if the prices of raw materials rise, Top Glove, like other glove manufacturers, has the advantage of being able to pass on the extra cost to customers.
What makes Top Glove different from other manufacturers is that it enjoys economies of scale mainly due to its size. It is the world's largest rubber glove maker and controls about 25% of the global market. Moreover, its plan to grow organically via the setting up of more factories enables Top Glove to register consistent growth.
The glove manufacturer's share price has fallen some 46% year to date. It closed at RM3.58 on Dec 30, 2008. Top Glove also provides consistent returns to its shareholders. Its gross dividend per share rose to 11 sen in FY2008 from 10 sen the previous year.
In terms of valuation, Top Glove is more expensive than other glove manufacturers. According to Bloomberg on Dec 31, Top Glove is trading at a price-earnings multiple of 9.51 times while peers Supermax Corp Bhd and Kossan Rubber Industries Bhd are trading at is 3.38 and 6.58 times respectively.
But despite the higher valuation, analysts are optimistic about the stock. JP Morgan, which maintains an "overweight" on the stock, with a target price of RM5, expects demand for the company's gloves to remain relatively resilient despite the global economic slowdown. Top Glove supplies 80% of its gloves to the medical industry.
The research house believes that there are good growth opportunities and potential new markets, given that healthcare spending as a percentage of gross domestic product is still very low in China and India.
