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PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 30 Oct 2020, 10:22 AM

 

Top Glove Corporation Berhad - Surprise On The Upside

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Top Glove registered a whopping 411.9% YoY growth for its FY20 net profit to RM1.87bn. Its performance was above both our and consensus projections at 122%. The commendable results were achieved mainly due to the steep ASP revision following the pandemic-led demand spike. With the supply of rubber gloves in the market continues to remain tight, we can expect the ASP for rubber gloves to stay elevated in the subsequent quarters and therefore, we raise our earnings forecast for FY21-22F by 203% to 354% to account for the higher ASP assumption. Given the unsustainable nature of such supernormal profits, we peg Top Glove’s CY21F earnings to a PE multiple of 10.5x (at +1SD of its 5-year historical mean), subsequently raising our TP to RM9.70 (from RM9.47 post bonus issue). Maintain Trading Buy. On a side note, Top Glove has also declared a final dividend of 8.5sen per share.

  • Yet another outstanding quarter. Top Glove’s revenue for 4QFY20 jumped 161% YoY to RM3.1bn, as a result of an aggressive ASP upward revision of 80% YoY. Additional capacities that came on stream also boosted sales quantity by 42.8% YoY to 18bn pcs. In order to capture the booming demand, utilization rate for its plants remained close to the 100% level. Improved operational efficiency, coupled with lower raw material costs (Nitrile: -16% YoY; Latex: -8% YoY), have resulted in margin expansion. Top Glove’s PAT margin grew by 34.9 ppts to 41.6% and reported a PATAMI of RM1.29bn in 4QFY20.
  • Raw material prices on the rise. Given the current supply shortage of nitrile butadiene in the market, raw material cost for nitrile gloves is expected to increase by c.10% on a MoM basis going forward. Note that nitrile gloves make up c.47% of Top Glove’s total sales volume currently, while the raw material cost constitutes c. 44% of the nitrile gloves’ production cost. Therefore, the quantum of cost increase in terms of total cost is estimated to be c.2%, which we believe can be sufficiently compensated by the expected increase in ASP.
  • Outlook still positive. Top Glove has guided further upward revision in its ASP in the coming months. ASP for nitrile gloves are expected to increase by 30% and c.10% in October and November, while latex gloves’ ASP are likely to raise by 5% MoM in both October and November. As for spot orders, it is currently priced at c.USD120 per thousand pieces and 30% of Top Glove’s total capacity has been allocated for spot orders. As such, we lift our earnings forecast for FY21- 22F by 203% to 354%, as we incorporate the effects of higher ASP and increased production capacity into our earnings projections. However, we reiterate that such supernormal profits are not sustainable in nature and earnings growth should be tapering off from FY22F onwards.

Source: PublicInvest Research - 18 Sept 2020

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