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PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 5 Jun 2020, 9:37 AM

 

Top Glove Corporation Berhad - Shifting Into High Gear!

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We came away from Top Glove’s 1HFY20’s briefing feeling optimistic on its 2HFY20’s outlook, as the Group has benefitted significantly from the Covid- 19 outbreak, with order visibility up till the month of August, as opposed to the three months norm. Given the current situation, we expect Top Glove to deliver stellar results in the coming quarters as they have increased ASP due to higher demand. Additionally, lower raw material cost, weaker Ringgit as well as better operating efficiency should also lead to stronger earnings. All in, we expect margins to expand going forward. We maintain our Outperform call, with a TP of RM8.60.

  • Gaining from the pandemic. While the Covid-19 outbreak was initially concentrated in Asia, the center of pandemic has now shifted to Europe, as declared by WHO. This signifies that the demand will also shift from latex gloves to nitrile glove and Top Glove was able to benefit from both as it has a good mix of nitrile and latex gloves. Thus far, the order visibility has reached till August, which is way ahead of its usual 3 months’ order backlog. Top Glove projects the total sales volume to grow by c.16% QoQ in 3QFY20, and the strong demand to sustain for months to come. Lead time is c.4 months currently, as opposed to the normal 1.5 months. In order to cope with the extra orders, Top Glove’s plants are now running well above 95% utilization rate. With the higher operating efficiency, weaker Ringgit, lower raw material prices and higher ASP, we expect FY20F PAT margins to expand by 1-2ppts YoY.
  • Shortage due to Movement Control Order (MCO)? Glove makers are allowed to continue operating during this MCO period as rubber gloves are deemed as essential medical items. MARGMA has also urged the government to authorize glove makers to operate at 100% capacity. However, we understand that Top Glove’s production floor and packaging team are currently operating at maximum capacity, while certain non-essential employees are assigned to work from home, as with other glove makers. Top Glove is also working with the Federation of Malaysian Manufacturers and MARGMA, to seek MITI’s approval for the supporting industries to operate. This includes the packaging material suppliers, chemical manufacturers and the likes, and some of these supporting entities have obtained MITI’s approval. Shipments and logistics, however, were not impacted by the MCO.
  • Expansion plan. Despite the MCO in Malaysia, Top Glove does not expect any delay in the commissioning of the 1st Phase of its F40 Plant (+2.7bn pcs nitrile gloves pa), which was scheduled to start operations in 2QCY20, as the Malaysian government has thus far been very supportive to the local glove makers, hence the construction works might be granted approval to carry on.

Source: PublicInvest Research - 27 Mar 2020

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TOPGLOV 16.50 +1.06 (6.87%) 16,398,100 

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