Author:kltrader | Publish date: Fri, 5 Jun 2020, 10:20 AM
Macquarie Equities Research (MQ Research) upgraded Top Glove’s target price (TP) to RM20.50 based on the increased assumption on Top Glove’s average selling price (ASP) by 10-15%, resulting in a 54%/44% increase in FY20E-22E earnings. Also, ahead of Top Glove’s earnings results scheduled to be released next week, MQ Research expects a better-than-expected 3QFY20 and an even stronger 4Q20.
Conclusion
MQ Research reiterates an Outperform rating on Top Glove with an increased target price of RM20.50 based on a higher CY21 price-to-earnings (PE) ratio of 40x vs RM12.30 on a 32x PE before. The strong pricing power and lower customer concentration risk provide Top Glove more flexibility to raise the average selling price (ASP), and now the company is looking to increase guidance, indicating upside risk to consensus estimates. As MQ Research views gloves as a staple within the medical sector, MQ Research thinks the valuation is undemanding and looks more attractive than consumer staples, which trade at a >40x PE with lower earnings growth of ~10% vs Top Glove: 27%.
Impact
New and more aggressive ASP strategy. Shortages have led to stronger pricing power for glove manufacturers. Based on MQ Research’s checks, Top Glove increased its June and July order deliveries higher than initial guidance of 5% per month. In addition, Top Glove implemented a new capacity allocation strategy for the remainder of 2020 – 10% for spot orders, which has at least a 2.5x-3x higher ASP, and increased its exposure to smaller distributors, which allows more upside risk to the ASP in this period. As such, MQ Research raises its FY20E-21E ASP assumption by 10-15%.
Expect good 3QFY20 results but 4QFY20 to be stronger. 3QFY20 results will start reflecting the COVID-19 orders and the total ASP increase of 10%-15% in March-May order deliveries. However, MQ Research expects 4QFY20 will be even stronger on the back of the more aggressive ASP increases and its new capacity allocation strategy. MQ Research expects the 2HFY20 earnings before interest tax, depreciation and amortization (EBITDA) margin will be expanded to 33%, the highest since its listing. MQ Research’s 2HFY20 implies a quadruple in net profit vs 1HFY20 (Fig1).
Multiple re-rating due to strong quarterly earnings. History has shown that Top Glove’s share price tracks quarterly earnings. MQ Research believes the next re-rating catalyst is strong 4QFY20-3QFY21 quarterly earnings. The stock is likely to re-test its peak PER valuation of 40x. MQ Research believes consensus has not baked in its latest strategy. MQ Research’s FY20E-21E are 83-88% ahead of consensus.
Earnings and Target Price Revision
MQ Research raises its FY20E-22E earnings per share by 54%/44% to reflect a higher ASP.
Price Catalyst
12-month price target: RM20.50 based on a PER methodology.
Catalyst: quarterly results, further ASP increases.
Action and recommendation
MQ Research reiterates an Outperform on Top Glove with a higher target price of RM20.50.
Author:kltrader | Publish date: Wed, 3 Jun 2020, 10:00 AM
Macquarie Research Report (MQ Research) summarized that Malaysia’s 1Q20 corporate results recorded the worst performance with 51% companies under its coverage reported missed on preliminary Covid-19 impact and provisions. While MQ Research expects earnings to slow further in 2Q20, they are expected to improve gradually in the next two quarters. MQ Research maintains its KLCI 20E target at 1,533 points with its top picks including Top Glove, Tenaga, CIMB and many others.
Event
1Q20 reporting season was the worst since MQ Research’s recording of quarterly results stats, with 51% of companies under MQ Research’s coverage that have reported to date missing estimates. Despite MQ Research’s reduced estimates for banks post 4Q19 results, increasingly lower net interest margins (NIMs) and higher credit costs led to 80% of banks missing estimates. Plantations and property were the other disappointments. Meanwhile telcos, utilities and (defensive segments of) oil & gas provided the positive surprises.
Covid and the ensuing movement control order (MCO) from mid-March had some impact on most sectors in 1Q, and the full impact is likely to hit 2Q20 results before showing some stability into 3Q and a rise into 4Q. MQ Research is now looking for a 10% year-on-year (YoY) decline in KLCI earnings per share (EPS) for 20E.
Impact
KLCI target held for now. With 20% of MQ Research’s coverage opting to delay results to June and the heavier-than-expected provisioning at the banks, MQ Research is maintaining its 1,533 (16x 21E price-to-earnings ratio (PER)) end-20E KLCI target for now. MQ Research’s core 20E KLCI EPS estimate for 20E is now -10% from +8.3% post 4Q19 results season. While consensus has reduced estimates as well, it is still expecting 1% YoY 20E EPS from +9% previously. MQ Research would expect material downside risk in coming weeks to EPS estimates.
The road ahead. As discussed earlier, MQ Research expects earnings to trough in 2Q20 before gradually improving. The key at this point is what happens to 21E estimates. MQ Research believes the impending cut in consensus estimates has been largely priced in and the market is already looking forward to 21E earnings. MQ Research’s estimates currently point to a 21% YoY increase in 21E KLCI earnings. The key risk to this would be a significant second wave of Covid cases – increasingly unlikely – and bank credit costs post the lifting of loan moratoriums in October.
Banks – the swing. Overall, bank results came in below expectations, but the real focus was on guidance downgrades, in particular, MAY/CIMB guiding credit cost estimates hitting 100bps/120bps, respectively. With most banks now anticipating further rate cuts in the next 12 months, the combination of NIM pressure, higher credit costs and the one-off modification loss telegraphs substantial downside risk to banks earnings in FY20/21.
Outlook
MQ Research remains constructive on the market post 1Q20 results. MQ Research’s top picks list continues to favour global leaders/exporters (TOPG, IHH, PCHEM, SDPL), defensives (TNB, RANH, telcos), construction (GAM, ECON) and selective banks (CIMB, RHBBANK). MAHB meanwhile is a play on the opening up of air travel and a medium-term play on an improved regulatory framework.
Author:kltrader | Publish date: Fri, 29 May 2020, 11:39 AM
Top Glove Trading at FY21 P/E of 11x Only; Maintain BUY
Massive earnings explosion in the coming quarters will throw brokers’ forecasts out the window. We raise our Top Glove's FY20-22E EPS by 37%/180%/18% as we impute for ASP hikes and spot orders until 1QFY21. We highlight that our FY21E EPS is still conservative as we impute for zero ASP hikes and zero spot orders from 2QFY21.
Post-earnings revision and pegging at a lower CY21E P/E target of 23x (from 30x; +0.5 SD to 5-year mean), our new Target Price is MYR20.00 (+83%, from MYR10.95).
Top Glove is our top pick.
Optimism From the Glove Players
Global demand growth: +20% p.a. in 2020-21
The demand has surged since the outbreak of COVID-19 in Feb 2020. The initial additional demand came from Asia, followed by US, Europe and most recently from Latin America, Russia and India.
According to the glove players, global demand growth would have been stronger at 30-50% in 2020, if not for the capacity constraint. Hence, glove players expect the global demand growth to be just around 20% in 2020 and another 20% in 2021, with stock replenishment activities supporting the growth in 2021. We understand that the glove distributors and key consumers (i.e. hospitals and clinics) are holding zero or close to zero inventories presently.
Additionally, the demand is very dire with some glove buyers (i.e. government agencies, NGOs) buying at spot market price (3x higher than the normal ASPs), for the delivery time is shorter (vs. waiting time of 8-12 months for normal orders).
We also understand that the customers pay 10-50% of the orders as down payments to the glove-makers. This reduces the cancellation risk but the customers can still opt to defer the delivery in the event of overstocking/slower demand.
Capacity growth: +16% and +14% in 2020-21
For the world’s 5 largest glove producers, we estimate that the combined effective capacity growth is 16% and 14% in 2020-21 respectively. The world’s 5 largest glove producers account for 55% of global demand share. As the capacity growth lags that of demand growth, this has resulted in severe tight supply with the sales lead time for most players extended to 8-12 months (from 1-2 months before COVID-19).
ASPs Still Cheap Despite the Steep Hikes
Though the sales are secured for the next 8-12 months, we highlight that the ASPs are not locked-in and the glove players can still adjust the ASPs 2-3 months prior to the deliveries. Additionally, the indicative ASPs on the purchase orders are based on the +5% m-o-m increase trend. Hence, the customers that gave orders to the glove players are agreeable to the higher ASPs in 1H21.
Comparing the confirmed ASPs in Sep 2020 against Jan 2020, the ASPs for nitrile gloves and latex gloves have increased 40-50%. Though the ASP hikes are steep, we highlight that the ex-factory price for a pair of nitrile examination gloves is still very affordable at only USD0.06 per pair.
Sector-wide ASP Hikes and Spot Orders
The sector has seen monthly ASP hikes for most players since Mar 2020 and the ASP hikes are 3-10% m-o-m. Glove players are optimistic that the ASP hikes could last until mid-2021 as they expect the stock replenishment activity to support the demand in 2021 and tight supply situation to persist.
There is also spot orders (i.e. urgent orders) with high ASPs (3x of normal ASPs) that would boost the glove players’ earnings. Spot orders accounts for 10% of Top Glove’s sales volume.
Our Earnings Forecasts for Top Glove
We raise our Top Glove's FY20-22E EPS by 37%/180%/18% as we:
Raise our blended ASP assumptions by 8%/39%/2% for FY20-22E. This assumes for monthly ASP hikes from Mar to Nov 2020 (3QFY20- 1QFY21) and spot orders from May to Nov 2020 (3QFY20-1QFY21). Though the glove players are certain that they will continue to raise ASPs in 1H21, we conservatively assume that there will be no ASP hikes and no spot orders from Dec 2020 (2QFY21) onwards. Our FY21E ASP growth is 35% and we assume for its FY22E ASP to fall 35% (revert to pre-COVID 19 level);
Raise our sales volume by 1%/14%/7% in FY20-22E as we update for its latest expansion schedule and also assume for a higher plant utilisation rate of 94% in FY21 (from 89% previously).
Prior to our earnings revision, every 1% increase in ASP would result in 4% increase in our FY21E net profit. However, post-earnings revision, because of the higher ASP base now, every 1% change in the ASP will only increase our FY21E net profit by 2%. Below is our scenario analysis under different ASP hikes.
We forecast Top Glove's quarterly net profit of MYR247m/MYR659m/MYR950m for 3QFY20/4QFY20/1QFY21.
Note that our 1QFY21E net profit accounts for 30% of our FY21E net profit as we assume for zero ASP hikes and zero spot orders from 2QFY21.
Author:kltrader | Publish date: Wed, 27 May 2020, 10:00 AM
We upgrade the sector to OVERWEIGHT as we turn more bullish on significantly uptrending ASPs and demand.
Despite possible vaccine discoveries in the near term, scaling up manufacturing capacity to achieve global herd immunity could take 12 months in the best-case scenario. This underlines our expectation of demand being sustained in 2021.
Valuations have yet to fully factor in an impending and sustained earnings surge.
Top pick: Top Glove
What’s New
Close to 300 vaccines and treatments in the pipeline but success rate is 10% or less. The COVID-19 pandemic has brought about an unprecedented urgency to develop a vaccine or treatment. To date, based on Milken Institute, there are 111 vaccines and 197 treatments in the pipeline to treat and prevent COVID-19. The critical mass of vaccines and treatments is imperative, given the success rate of the candidates is typically 10% or less based on preclinical studies through clinical trials to licensure, according to a study by Boston Consulting Group (BCG).
Possible discovery of a vaccine or treatment over next 1-2 quarters... At this juncture, there are two vaccines and six treatment drugs at Phase III of clinical trials. Phase III is the last stage prior to the drug being approved, provided it has proven safety and efficacy. Thus, it may be possible for a breakthrough vaccine or treatment in the next 1-2 quarters.
…but will take 12-18 months to achieve global manufacturing scale needed for herd immunity. However, once a vaccine is successfully validated, it must be produced at a scale that can enable herd immunity. BCG estimates this translates into coverage of more than 60% of the world’s population, which would require up to 5b doses for a vaccine. The production needed to reach such a global manufacturing scale would take for at least 12 to 18 months or 2Q-4Q21. 2Q21 is the best case timeline estimated by BCG.
ASPs have surged against backdrop of demand spike. Delivery lead times have extended to 11 months from the usual 30-45 days. ASP revisions have varied across all the producers, however they are broadly expected to continue to rise until end-20. That said, 3Q20 ASPs appear to have taken a significant step change q-o-q relative to 2Q20’s q-o-q mid-to high-single-digit growth.
Action
Upgrade to OVERWEIGHT from MARKET WEIGHT. We turn more bullish on the sector as ASPs surge past our expectations. Aside from that, we believe elevated demand could be well sustained up till 2Q-4Q21, underpinning our 2021 earnings outlook. We believe profit taking upon discovery of a vaccine may be too premature. A more reflective measure is potential shortening of delivery lead times and sharp ASP reversions. However, glove usage is likely to remain widespread until a vaccine and/or treatment production achieves global manufacturing scale in 2Q-4Q21 in a best-case scenario. Our upgrade to OVERWEIGHT is premised on:
multi-fold valuation gain have yet to fully factor in the impending earnings surge over the quarters ahead;
sustained glove demand over 2021; and
scarcity of safe haven earnings growth (2-year earnings CAGR of 43% in 2019-21) as most other sectors face multitude of headwinds.
Our top pick for the sector is Top Glove.
Aside from our BUY on Kossan, a high proportion of OBM sales and the possession of its own distribution positions Supermax as a forefront beneficiary of the surge in glove ASP.
ASP base expectation: Peak in late-20 to early-21 before trending downwards gradually. Overall, our base assumption is for ASPs to peak in late-20 to early-21 before gradually trending down across 2021. However, given the low base in 1Q20, we expect average ASP to grow y-o-y in 2021. Instances of a second wave of COVID-19 infection or overall emergency restocking have prompted elevated demand. For example, despite China containing COVID-19 by early-March, some glove producers are still receiving double the usual orders.
Bumper year for 2020 but post previous outbreaks, volume growth have averaged only -1%. The Malaysian Rubber Glove Manufacturers Association (MARGMA) expects industry volume to grow to 345b pieces in 2020 (from 298b), a surge from the average 10- year growth of 8-10%. Notably, in post-pandemic periods, volumes contracted only 1%. We believe demand growth is supply-capped, arising from producers operating at already maximum utilisation rates. Thus, it is possible for an overspill of demand into 2021-22.
Still unable to meet demand despite capacity surge. Ytd, the Big-3 producers have their expansion plans intact. We expect capacity additions of close to 7%, 10% and 19% for Hartalega, Kossan and Top Glove respectively. Other producers such as Sri Trang, Riverstone, Comfort Gloves and Rubberex are expected to see a capacity addition of 23% and all producers would collectively add 17% to total capacity for 2020. While it outstrips historical demand growth of 8-10%, it coincides well with the surge in demand. However, it falls considerably short of meeting demand, as reflected by delivery lead times of 11 months.
Raw material prices continue to trend lower. Going forward, operating margins could be aided by a slump in raw material prices. Latex prices have declined 9.5% from 1Q20, given soft latex demand (30% of demand is derived from rubber tyres). Meanwhile, nitrile prices are 8% lower in May. According to our calculations, every 1% drop in raw materials costs could boost earnings by 1-4%. That said, we do not expect any cost savings pass through, seeing the imbalance in demand-supply dynamics.
Potential upside from our RM/US$ assumption. We have a RM4.30/US$ assumption for 2020-21. However, should the ringgit depreciate further from our assumption, our calculations show that every 1% depreciation of the ringgit vs the US dollar could beef up glove makers’ earnings by up to 4% (this excludes the shared cost savings mechanism with customers which will consequently moderate any significant gain in margins).
We have revised our earnings forecasts and assumptions based on our more bullish outlook for the sector.
We expect ASPs to peak in late-20 to early-21, followed by a gradual downtrend over the rest of 2021. However, given that ASPs were not inflated in 1Q20, we expectASPs to remain higher y-o-y in 2021.
ASPs across the three producers vary because of:
their different year ends;
how ASPs trended over 2019 in relation to the respective glove companies’ year-ends; and
the varying ASP locked in for the respective companies.
The economies of scale are not fully realised as we expect glove companies’ effective tax rates (Top Glove: 13%, Hartalega: 21%, Kossan: 19%) to normalise closer to the corporate tax rate of 24%. This arises due to the bumper year in earnings against the companies’ unchanged capital allowance.
Based on our revised ASP assumptions, we raise Top Glove’s FY20-21 net profit forecasts by 55% and 118% respectively; and Hartalega’s FY21-22 net profit forecasts by 5% and 71% respectively. We had earlier factored in our more bullish outlook into Kossan’s earnings.
Top Glove Corporation (BUY/Target: RM14.72)
Upgrade to BUY from HOLD with a higher target price of RM14.72 (from RM6.05). Our target price is based on 29.5x 2021F PE, or +1SD of its 3-year forward PE mean. Top Glove is best poised to benefit from the surge in ASPs by virtue of possessing the highest operating leverage. The premium is also fair as Top Glove pivots into the generally faster-growing nitrile glove space and captures the gradual re-rating from its inclusion into the FBMKLCI, catching up to Hartalega.
Using the latest FX rate of 1RM to 0.3255SGD, we derive target price of 4.79 in SGD term.
Our recommendation and target price are maintained as we had previously factored in our more bullish assumptions into Kossan’s valuations. Our target price is based on 23x 2020F PE, or +1SD of its 3-year mean PE. This factors in the attractive 2-year earnings CAGR of 69% over 2019-21).
We believe consistent execution and growth, backed by its Bidor development, could eventually translate to a multi-year earnings compounder for Kossan. Therefore, we believe its valuations should narrow closer to that of Hartalega and Top Glove.
Hartalega Holdings (HART MK/HOLD/Target: RM10.24)
Upgrade to HOLD from SELL with a higher target price of RM10.24 (from RM7.36). Our target price is based on 45.0x 2021F PE, or its +2SD of its 3-year forward PE mean. The premium can be justified by Hartelega’s strong operating efficiency under ordinary circumstances and innovation ahead of peers. Aside from that, the Next Generation Manufacturing Complex (NGC) 2.0 provides visibility over medium-term growth.
Nevertheless, our HOLD call is premised on Hartalega’s valuations being priced in at this juncture, which limits potential price upside. Entry price is RM9.00.
Risk
Discovery of a vaccine and/or treatment could cause negative newsflow, however, as we have previously highlighted, scaling of global manufacturing to achieve herd immunity may take 12 months and beyond. Aside from that, peak mass testing may translate into lower glove demand as well.
Downside risks are spikes in raw materials costs, a strengthening ringgit, sharp ASP reversion and COVID-19 outbreak among the production workforce. Upside risks are supply disruption to the broader industry and a strengthening US$.
Author:kltrader | Publish date: Wed, 20 May 2020, 12:00 PM
3Q20 slip back to red, lower profit margin coupled with higher R&D expenses
3Q20 results disappoint, posted revenue of RM36.3m (yoy:+87.3%, qoq:-34.0%) higher compare to same quarter last year but lower compare to previous quarter while loss widen with loss before tax of RM7.2m compare to PBT of RM0.1m in previous quarter. 9 months cumulative revenue accounted for 62.7% of our full year estimate while loss widen to RM5.9m against our earnings estimate of RM2.4mil.
Operation affected by MCO, outlook dampens by Covid-19
The Group production output affected by initial phase which resulted in more than 50% loss of production in the month of March 2020 although received approval to operate at full capacity since 29 Apr 2020, earnings further dragged down by increase in minimum wage in Feb 2020 and weaker profit margin from change in sales mix of different product.
No dividend declared, expect dividend cut as FCF weakens
No dividend declared for the current quarter, expect dividend cut to strengthen its cash position as FCF weakens.
Upgrade to Hold recommendation with lower TP of RM0.48
We maintain our FY21F estimate considering new products to be launched this year. In line with global stock rout, Salutica shares has fall substantially to reflect the challenging outlook thus we upgrade our recommendation to Hold with lower target price of RM0.48 based on P/E of 10.0x on our estimated EPS for FY21F.
Author:kltrader | Publish date: Mon, 18 May 2020, 9:36 AM
Macquarie Equities Research (MQ Research) hosted a political analyst in a call to get his views on the ongoing political situation in Malaysia. The current view is that a change of government is unlikely, which should be positive for the market. Further, the market is now looking forward to end-May when the government is expected to announce its stimulus package for the economy.
Event
MQ Research hosted political analyst, Jahabar Sadiq, on a Macquarie Insights call on Friday morning (15 May) to get his views on the ongoing political situation in Malaysia. In conclusion, Jahabar feels that a vote of confidence is unlikely to materialise soon and even if it did, the chances of a change in government are low. This should be positive for the market as it should at the very least remove a layer of uncertainty that may be clouding investors’ perception.
Separately MQ Research has tried to gauge the level of activity in the Malaysian economy using data from the World Air Quality Index and Google Earth’s Engine, which uses data from Copernicus Sentinel Data. In summary, based on these data sets, activity levels have picked up since the lifting of the MCO, but appear to be below levels in 2019.
Impact
Politics – noisy but unlikely to impact. With the leader of Parti Keadilan Rakyat, a key component (39 out of 92 MPs) of the Opposition, Anwar Ibrahim is said to have given his word not to file the motion; it is questionable if Tun Dr Mahathir has the numbers to have the motion passed. This should leave the Perikatan government in power and able to push through the much awaited post-MCO stimulus packages. Note that the vote of no confidence will not be carried out on 18 May. This means the earliest it can be held is during the July/August parliamentary sitting. Jahabar believes the more likely timing of the vote will be during the debate of the 2021 Budget in October/November.
Stimulus next. The market is now looking forward to end-May when the government is expected to announce its stimulus package for the economy. With many businesses still struggling, this will be an important event. According to Jahabar, key infra projects are on track despite the tight fiscal situation. MQ Research expects the MRT3 and potentially HSR projects to be key components of the post-MCO stimulus. Others including the Johor-Singapore RTS project could see light of day too.
The challenge? With PM Muhyiddin’s coalition partners seeking a bigger role in government, the move to political appointees to head government institutions is likely to continue. While not positive, MQ Research thinks the key for government linked companies (GLC) under its coverage will be that professional managers continue to drive the business and adhere to strict corporate governance. To that end, MQ Research believes there are sufficient checks and balances at least in the listed space.
Outlook
Reduced risk of a further change in government should be positive for the market and the construction sector in particular. Within construction GAM and ECON remain MQ Research’s top picks. MQ Research also continues to favour global leaders/exporters (TOPG, PCHEM, SDPL, IHH), defensives (TNB, RAHH, telcos) and selected banks (CIMB, RHBBANK).
Author:kltrader | Publish date: Wed, 13 May 2020, 6:20 PM
Letter of award from JX Nippon Oil & Gas Exploration (Malaysia) Destini announced that wholly-owned Destini Oil Services had on 22 April 2020 received a letter of award for the provision of tubular equipment and services for JX Nippon Oil & Gas Exploration (Malaysia) Limited. JX Nippon and PETRONAS Carigali are joint venture partners for the exploration, development and production of crude oil and gas for Block SK10 offshore Sarawak. The contract is for four years with one-year extension option. We concur the contract is positive but impact on annual earnings remains difficult to estimate until contract commencement date and sum are confirmed.
Destini utilizing extension of time for issuance of annual report and 1QFY20 results Destini had on 5 May 2020 announced that it will utilize the extension of time granted by Bursa Securities for the issuance of its Annual Report for FY2019 and quarterly reports for 1QFY2020 by 30 June 2020. It also said that an application for the extension of time to hold its AGM up to 30 September 2020 would be submitted.
Covid-19 pandemic continues to cloud business and market outlook The Covid-19 pandemic and various degrees of movement lockdowns throughout the world have clouded the global economic, business and market outlook. Even though the movement control order has been relaxed in Malaysia, there is still no end in sight to the pandemic and fear of second wave infections has again heightened business and market uncertainties. Battered 2020 is best ignored by longer term investors. Destini’s share price of RM0.15 looks attractive going forward into 2021, implying FY21 forward PE of 9.4x based on our current forecast of 1.6 sen, which is subject to revisions pending release of 1QFY20 results and confirmation of value for the abovementioned contract award. We maintain our BUY call and target price of RM0.22 for Destini.
Author:kltrader | Publish date: Wed, 13 May 2020, 5:19 PM
Letter of award from JX Nippon Oil & Gas Exploration (Malaysia)
Destini announced that wholly-owned Destini Oil Services had on 22 April 2020 received a letter of award for the provision of tubular equipment and services for JX Nippon Oil & Gas Exploration (Malaysia) Limited. JX Nippon and PETRONAS Carigali are joint venture partners for the exploration, development and production of crude oil and gas for Block SK10 offshore Sarawak. The contract is for four years with one-year extension option. We concur the contract is positive but impact on annual earnings remains difficult to estimate until contract commencement date and sum are confirmed.
Destini utilizing extension of time for issuance of annual report and 1QFY20 results
Destini had on 5 May 2020 announced that it will utilize the extension of time granted by Bursa Securities for the issuance of its Annual Report for FY2019 and quarterly reports for 1QFY2020 by 30 June 2020. It also said that an application for the extension of time to hold its AGM up to 30 September 2020 would be submitted.
Covid-19 pandemic continues to cloud business and market outlook
The Covid-19 pandemic and various degrees of movement lockdowns throughout the world have clouded the global economic, business and market outlook. Even though the movement control order has been relaxed in Malaysia, there is still no end in sight to the pandemic and fear of second wave infections has again heightened business and market uncertainties. Battered 2020 is best ignored by longer term investors. Destini’s share price of RM0.15 looks attractive going forward into 2021, implying FY21 forward PE of 9.4x based on our current forecast of 1.6 sen, which is subject to revisions pending release of 1QFY20 results and confirmation of value for the abovementioned contract award. We maintain our BUY call and target price of RM0.22 for Destini.
Author:kltrader | Publish date: Tue, 12 May 2020, 10:26 AM
Although the Conditional Movement Control Order (CMCO) has been extended to 9 June, Tun Dr Mahathir’s motion for a vote of no confidence was approved by the Speaker of the house to be tabled in Parliament as early as 18 May. Macquarie Equities Research (MQ Research) thinks this is negative for sentiment but outcome is uncertain, and is of the view that another change in government could delay government spending.
Read on for a summary of MQ Research’s report (11 May) and its top stock picks.
Event
Tun Dr Mahathir’s motion for a vote of no confidence at the next parliament sitting was approved by the Speaker of the house. However, whether the motion is actually debated is uncertain and more importantly by Dr M’s own admission, it is not clear whether he has the numbers to push the motion if it is. The uncertainty is certainly not positive for the economy nor the market, but based on the performance of the KLCI (+0.39%) on Friday, it appears that the market has brushed this off. MQ Research believes that ultimately, another change in government is most negative for sectors reliant on the government for contracts, e.g. construction. For other sectors, further changes will have less of a bearing, especially as the focus now is on a post MCO recovery in the economy.
Impact
Motion allowed but uncertainties remain. Based on news reports in early March when PM Muhyiddin Yassin was sworn in, the Pakatan Harapan coalition claimed it had as many 115 MPs on its side. This number has bounced around, and until an actual vote is actually carried out, the outcome is uncertain. The best outcome at this point, given the ongoing Covid pandemic, may be to allow PM Muhyiddin to lead the country till the end of the year before calling for a General Election, to settle the matter once and for all.
Major infrastructure projects needed and on the agenda for both sides. While another change in government would be negative for newsflow for major infra projects such as MRT3 and the Highspeed Rail (HSR), MQ Research notes that this was also on the agenda for Pakatan Harapan before they were removed from power. With a need to stimulate the economy post-MCO, MQ Research remains hopeful that these projects will be announced before the year is up. MQ Research believes investors should stick with companies that stand to benefit from an increase in spend, regardless of who is in power. To that end, Gamuda and Econpile remain MQ Research’s key picks within the construction sector.
Other potential delays. Another change in government could delay government spending on IT, although MQ Research notes that some work has already begun in recent months. In the telco sector, the 5G awards could be delayed further, but spending on the RM10bn National Fibrerisation and Connectivity Plan (NFCP) has already begun.
Outlook
MQ Research maintains its top picks (Top Glove, IHH Healthcare, Sime Plantation, Petronas Chemicals, Malaysia Airports, Gamuda, Econpile, Tenaga Nasional, CIMB, RHB Bank) for now as it believes they each have specific drivers which will lead to outperformance even if another change in government is upon us.
Author:kltrader | Publish date: Tue, 12 May 2020, 9:53 AM
Raising EPS and Target Price; Maintain BUY
With Top Glove's sales secured until Apr 2021 and some of its peers’ capacities also locked-in for the next 6-12 months, we expect the present positive environment to sustain into 1Q21. We raise our FY20-22E EPS by 54%/112%/5%, projecting for its EPS to increase by 128%/35% in FY20-21E and to fall 50% in FY22E.
Based on an unchanged CY21 P/E of 30x (+1SD to mean), our target price is raised to MYR10.95 (+73%).
Key catalyst is its potentially superb upcoming 3QFY8/20 results (to release on 18th Jun).
Secured Orders Until Apr 2021
Top Glove has secured orders until Apr 2021 with its sales lead time stretched to 10 months now (from 5 months in Apr 2020 and 1.5 months before the COVID-19 outbreak). However, the ASPs quoted to customers are indicative ASPs and could still be revised 1-2 months prior to the deliveries.
Also, there have been some ad-hoc orders (c.3-5% of quarterly total sales) with ASPs substantially higher than the market’s ASPs. Top Glove's plant utilisaton rate has risen to 97% (from 85% in 2QFY8/20) and it is sticking to its expansion schedule (refer to Figure3 in attached PDF report).
Sector-wide ASP Hikes
In addition to Top Glove, we also note that other key players have fully-sold their capacities for the next 6-12 months (Kossan: sold until end- 2020, Sri Trang: latex gloves capacity is sold until Mar 2021 while nitrile is sold until Jun 2021). The sector ASPs have been rising since Mar 2020 and we expect the present ASPs to sustain into 1Q21.
3QFY8/20: to Beat Consensus Significantly
We expect Top Glove's net profit of MYR220m (+90% q-o-q, +2.9x y-o-y) on:
higher sales volume (+c.15% q-o-q, +c.14% y-o-y);
EBITDA margin of 22% (2QFY20: 17%) on better ASP and higher operating leverage.
We also expect Top Glove’s 4QFY20 net profit to be even higher at MYR350m based on our assumed revenue growth of 15% q-o-q and EBITDA margin of 28%.
Our FY20-22E EPS is raised by 45%/107%/19% respectively, as we raise our ASP assumptions, which resulted in substantial EBITDA margin expansion of 3.8-ppt/7.3-ppt/0-ppt in FY20-22E.
Be the first to like this. 
