Despite 3Q earnings being stronger than 2Q, Adventa’s 3QFY10/10 missed our expectations as we had expected higher sales and an improvement in margins. Annualised 9M10 net profit made up only 86% of our full year forecast. Factoring in lower sales volume and higher costs, we cut FY10-12 EPS by 9-12%. As we are now approaching the final quarter of 2010, we roll forward our target price to end-11.
However, given the two consecutive earnings disappointments, we now apply a wider discount of 30% (from 20% previously) to Top Glove’s target P/E of 15.2x, which is based on an unchanged 10% premium to target market P/E. As a result, our target price is cut from RM4.45 to RM4.10. Despite the earnings and target price cuts, we believe that there are stronger quarters ahead and continue to rate the stock a BUY. Potential rerating catalysts include profit improvement supported by the recovery in demand as well as further capacity expansion.
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