Source: TheEdge Malaysia

KUALA LUMPUR: Top Glove Corp Bhd reported net profit of RM45.06 million in the fourth quarter ended Aug 31, 2010, down 20.6% from RM56.81 million a year ago.

It said on Wednesday, Oct 6 that revenue was 27.5% higher at RM541.38 million from RM424.51 million a year ago. Earnings per share were 7.3 sen versus 9.39 sen. It declared dividend of nine sen per share compared with 7.5 sen.

It said the earnings showed a decline despite higher sales due to normalised demand and oversupply of capacity situation.

“This was further aggravated with persistently high latex prices and weakening of US dollar, which affected the group’s revenue and profit margins. To date, latex price has increased by around 55% and US dollar has weakened against the ringgit by around 13% since beginning of the financial year 2010 (12 months ago),” it said.

For the financial year ended Aug 31, 201, net profit rose 45% to RM245.28 million from RM169.13 million. Revenue increased 35.9% to RM2.079 billion from RM1.529 billion.

Daniel Wong's Recommendation:
 Fair Value: RM 5.49

Current Price: RM 5.50

Recommendation: HOLD/SELL

There's a possibility that the earnings of Topglove will continue to drop in the next 3 to 6 months. Thus, the share price will continue to drop as well. But in the long term (more than 3 years), I expect the earnings to go back up for 2 reasons: 1) Demand on rubber gloves continue to grow every year, albeit at a normalised rate now; 2) I believe the over capacity problem is just temporary. As all the rubber glove manufacturers began to 'come to their senses' that they shouldn't expand too much and too fast, their plan for factories expansion will be deferred. So in times to come, I expect that the economics of supply-demand will be back in equilibrium. When that time comes, Topglove will be able to effectively increase the price of rubber gloves to cover the increasing latex cost. In fact, latex price does not always go up, as you can see here:

However, there are 'signs' that the US Dollar will continue to be weaken against the Ringgit. For this reason, I personally would Sell at least half of my holdings in rubber glove shares to take advantage of the sharp drop in their market prices, if it is to happen. ;-)



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