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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 14 Aug 2020, 10:24 AM

 

Top Glove Corporation - Supercharged ASP Rises Again

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We came away from a meeting with management feeling even more optimistic on their prospects over the next few quarters fuelled by sustained high ASPs. Contrary to our earlier assumptions, the industry ASPs have risen even further month on-month in anticipation of tighter supply and supernormal demand due to the pandemic. Management has guided that Aug ASP is 30% higher M-o-M instead of earlier guidance of +10%. This prompts us to raise our FY20E/FY21E ASP assumptions. Hence, we raise our FY20E/FY21E net profit by 16%/120%. TP is raised from RM25.00 to RM32.00 based on 21.5x CY21E EPS. Reiterate Outperform.

ASPs in Aug higher than earlier guidance. We came away from a meeting with management feeling optimistic on prospects over the next few quarters fuelled by sustained high ASP. Contrary to our earlier assumptions, the industry ASP has risen further month-on-month in anticipation of tighter supply and supernormal demand due to the pandemic. Management has guided that Aug ASP is +30% higher m-o-m which exceeds the earlier guidance of +10%. Recall that previously, we highlight that TOPGLOV’s ASP for months of June to Aug was higher by between 5% to 15%, due to continuous supply tightness. Additionally, we understand that spot price is expected to move up starting from September 2020. Presently, spot price is about 3x the normal prices of USD28-30/1000 pieces which accounts for 20% of total capacity allocation. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry average prices. Due to the tight supply, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after due to limited supply. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. The robust demand has led to longer delivery lead times which has risen to >400-500 days from 80 to 100 days two months ago.

Raised FY20E/FY21E net profit by 16%/120% after i) hiking our ASP from USD32/USD33/1000 pieces to USD32//USD40/1000 pieces for FY20E/FY21E, and ii) raise FY21E volume sales growth from 28% to 40%.

Reiterate OP. TP is raised from RM25.00 to RM32.00 based on 21.5x CY21E EPS of 152.3 sen (previously 36x) (at +0.5 SD above 5-year historical forward mean). We lowered our PER rating as we believe valuations are pegged to supernormal earnings; hence, upside to peak earnings should have been factored in. Its merits are: (i) strong management, (ii) resilient earnings base due to its pricing power and its sheer size in capacity in the industry, and (iii) solid earnings growth averaging >100% in FY21 compared to PERs of 15x.

A key risk to our call is lower-than-expected volume sales and ASP

Source: Kenanga Research - 13 Jul 2020

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TOPGLOV 24.18 -0.82 (3.28%) 8,924,300 

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