Author:kltrader | Publish date: Thu, 22 Oct 2020, 9:57 AM
In a report released on Monday (19 Oct), Macquarie Equities Research (MQ Research) said that unemployment begun to show signs of stagnation at 4.7%, though MQ Research’s adjusted numbers show a 0.3% improvement. The unemployment stress falls heavily on the youth (15-24 year olds), suggesting that impact to banks’ asset quality will be minimal.
Labour Market Stats
After a brisk post-lockdown recovery, reported unemployment improved a marginal 3bps to 4.67% (July: 4.71%, peak: 5.26%). However, when considering MQ Research’s adjusted unemployment figures (Fig 2 below), MQ Research sees substantially more improvement of ~36bps coming off a higher base. Labour participation rates also normalised to 68.4%, which allows MQ Research’s numbers to converge with the official stats in August.
Macro read-thru: <4% unemployment by 2021?
The initial low-hanging rehiring post-lockdown appears to be losing momentum in August. Total new employment grew +81k month-on-month (m/m) to 15.15m. Meanwhile gross unemployment fell on -3k m/m to 742k, which is still 43% or 223k above pre-Covid average of 518k. Meanwhile, active job-seeking improved in August on improved rehiring prospects post-lockdown. Winding down of moratoriums by end-Sept likely another incentive for more active job seeking.
On a positive note, long-term unemployment (>6 months unemployed) remains relatively stable at 148k. However, this indicator still needs to be monitored closely in 4Q20 as Covid-related layoffs in 2Q20 will need ~6 months to age into the statistic.
Looking ahead, 4Q20 data will be critical. MQ Research anticipates unemployment could dip below 4% by end-2020 if employment can average +45k/month growth, assuming labour force grows at an average of +20k/month. However, there is cause for caution as 1) greater Klang Valley subject to conditional movement control order (CMCO) soft lockdown from Oct 14-27, and 2) wage subsidy program (RM600/month, up to six months) will begin expiring October onwards, barring further extension with Budget 2021 announcement. Note, six months of wage subsidies cost RM10.38bn and is estimated to have benefited ~2.62mil employees and 320,440 employers.
Banks Read-thru
MQ Research’s read-thru on banks’ asset quality is a little more constructive. Firstly, unemployment stress is heavily skewed to youth aged 15-20 with 13.7% unemployment – roughly 30% above pre-Covid, average of 10.5%. This demographic makes up ~55% of total unemployment. Considering the younger demographic has lower income levels coupled in addition to lower exposure to total banking system loans bodes well for banks’ asset quality.
BNM’s financial stability review (see: link) also indicated that the bulk of unemployment was skewed to low/variable wage earners. MQ Research concurs with BNM’s constructive on households’ asset quality through the crisis. MQ Research’s order of preference: RHB > CIMB > HLBK > PBK > MAY > AMM.
Author:kltrader | Publish date: Tue, 20 Oct 2020, 10:42 AM
With the release of the September 2020 Malaysia Palm Oil Board (MPOB) stats, Macquarie Equities Research (MQ Research) stated in its report (19 Oct) that it remains positive on the near-term outlook of crude palm oil (CPO), and believes purchase momentum from China and India in 4Q20 should support the CPO price.
Event
Following the release of September 2020 MPOB stats, MQ Research remains positive on the near-term outlook of CPO. MQ Research believes demand from China and India will be amplified in 4Q20 due to the upcoming festive seasons (Nov-Feb) starting with Diwali, Christmas, New Year and Chinese New Year. While demand remains on an uptrend, Malaysia’s production is still lagging with 9M20 production coming at 4% lower than that of 9M19. If the production recovery is not as swift, we are likely to see the MPOB stock-to-usage ratio remain tight at 8.5% or lower, thus supportive of the CPO price.
Impact
Spikes happen when CPO prices go beyond RM3,000/mt. MQ Research previously highlighted that when MPOB stocks-to-use (S/U) ratio trends below 8.5% for more than 3 months, the CPO price tends to trade closer to RM3,000/mt. What was apparent since the demand recovery in May 2020 was that the CPO price had recovered while the share prices of plantation companies remain as laggards. MQ Research tracks the CPO price vs share price movements of the top 4 plantation companies in Malaysia and observe that share prices spiked up when the CPO price went beyond RM3,000. Given strong demand vs the weak production recovery backdrop above, MQ Research believes the CPO price will break the RM3,000/mt level in 4Q20 and drive plantation share prices higher.
Laggard share price movement vs the CPO price is due to less participation by active foreign funds. Since the environmental, social and governance (ESG) concerns were raised on plantation companies, more so after the 2019 Southeast Asian Haze incident, there are less active foreign funds investing in the plantation companies; those remain are mostly passive funds. While local funds hold substantial positions in plantation companies, MQ Research believes higher CPO prices and profits will support a rotation into the sector. Similar outcome was seen in Indonesian planters as foreign shareholdings declined sharply in CY20. (i.e. London Sumatra Indonesia (LSIP IJ) saw over US$28m outflow over the last 5 years, with US$6m YTD).
La Niña will likely turn Brazil into a net importer of soybeans – supportive of CPO prices. The La Niña in South America has seen soybean producing countries like Brazil and Argentina impacted severely by the dry weather. With soil moisture supplies at super low, Brazil will likely turn into a net importer of soybeans by year end. Upward pressure on the soybean oil (SBO) price throughout Nov-Jan would provide support to the CPO price.
Outlook
MQ Research’s sector top picks are Sime Darby Plantations and London Sumatra due to their high CPO price leverage.
Author:kltrader | Publish date: Thu, 15 Oct 2020, 9:42 AM
In a report released yesterday (14 Oct), Macquarie Equities Research (MQ Research) had mostly positive takeaways from Bank Negara Malaysia’s (BNM) 1H20 Financial Stability Review (FSR) and analyst briefing, with credit risks not as bad as initially feared.
FSR Highlights
The overall takeaway from the FSR briefing was positive, from the content of the report to the tone and outlook of the central bank. While uncertainty persists (e.g., the recent CMCO), the hard lockdown in March/April is now the demonstrable low-point of the crisis. The central bank reiterated the positive trajectory of macroeconomic data, albeit an uneven recovery (high touch service, tourism, oil and gas continue to lag), for example, guiding for continued decline in unemployment, on stable rehiring activity and decelerating layoffs. Indicators of financial resilience were also encouraging, says BNM, with R&R (restructuring and rescheduling) for individuals and small and medium sized enterprises (SME) coming in at ~600,000 applications to date – much lower than the 3 million initially anticipated. Following the moratorium expiry, loan repayments have rebounded to 70% already and are expected to rise further.
Stress test: BNM’s refined stress test anticipates loan impairments will peak at 4.1% by end-2021 (June: 1.6%) – in MQ Research’s view, far from an alarming figure. Households are expected to drive 12% of said impairments, with 42% coming from large corporates and the balance from other businesses. In turn, this is expected to trim 140bps from sector common equity tier 1 (CET1) ratio to 13.2%; still well above statutory requirements. The stress test assumes banks will see default 8x historical rates (vs Asian Financial Crisis, impairments rose 3-5x).
Policy ammunition: Outside of further interest rate cuts (arguable, little more to cut and effectiveness is low) a broad range of policy tools are still available to the central bank, to blunt the impact of further shocks. BNM emphasised that it still has funds in reserve to deploy additional funding support to businesses (e.g., directly via Special Relief Fund or indirectly via guarantees like Credit Guarantee Corporation). In addition, BNM will ensure banks’ do not adopt excessive risk aversion, instead providing policy flexibility (e.g. transitional capital accounting) to ensure supply of credit remains supportive of economic recovery; positive for asset growth.
Capital management: While stressing that banks remain adequately capitalised, BNM did not provide meaningful insight into policy regarding banks’ dividend payouts. The complete absence of interim dividends in 1H20 suggests high conservatism. MQ Research anticipates FY20/21 dividends may disappoint on the downside, and will hinge on uncertainty of outlook.
Outlook
The FSR affirms MQ Research’s constructive view on the economy vs a reasonable credit cost cycle from the crisis. MQ Research reiterates RHB/CIMB as its top sector picks – both are cheap recovery plays. HLBK is MQ Research’s preferred defensive pick over Public Bank. Least preferred banks are Maybank and AmBank.
Author:kltrader | Publish date: Wed, 14 Oct 2020, 11:21 AM
Committed to Safety and Quality
As an international healthcare service provider operating in a highly-regulated business environment, IHH Healthcare adheres to the laws and regulations which cover key aspects of its business (from patient safety to waste disposal). There could be incremental pressure for healthcare reforms but we think IHH Healthcare could be largely unaffected as its patient pools are less price-sensitive.
Maintain BUY on IHH Healthcare.
Governance – Patient Safety and Data Protection
Patient safety is at the forefront of IHH Healthcare’s business philosophy. As such, it has established an all-inclusive clinical governance framework and also conducts Central Quality Improvement Forum (CQIF) on a monthly basis to ensure that all of its patients receive the best possible care. It also adopts robust data protection system to protect its patients’ data.
To mitigate bribery and corruption risks, standard operating procedures are used in its procurement and tendering processes.
Social – Accessible Healthcare to the Communities
As healthcare plays a crucial role to the communities it serves, there could be incremental pressure for healthcare reforms to tackle the rising healthcare cost. That said, IHH Healthcare is reputed for its premier service quality and is among the most prestigious in Asia, Central and Eastern Europe. As such, we think its patient pools globally are less price-sensitive and IHH Healthcare would be able to adjust its prices to pass on any cost inflation or healthcare reform costs, leaving its EBITDA margins largely intact.
As for the vulnerable communities, IHH Healthcare provides a considerable amount of resources via its various CSR programmes.
Environmental – Waste Management
IHH Healthcare ensures that the materials it purchases generate as little waste as possible that is toxic, non-repairable or non-recyclable. For the waste it generates, its waste management processes are carried out in strict compliance with national guidelines/legislation. Additionally, the waste contractors hired are certified and licensed by local authorities.
Author:kltrader | Publish date: Wed, 14 Oct 2020, 11:18 AM
Reuters, a global news provider, reported that its sources indicate that Top Glove has hired banks to arrange a Hong Kong listing that can raise US$1bn-2bn.
Yesterday, Top Glove made a Bursa announcement indicating that it is evaluating a dual primary listing on Hong Kong’s stock exchange.
Reuters Reported That Top Glove Has Hired Banks to Arrange a Hong Kong Listing
Reuters, a global news provider, reported that two unnamed sources revealed that Top Glove has hired three banks (Citigroup C.N, China International Capital Corporation, and UBS) to arrange a Hong Kong (HK) listing.
While this information has been neither confirmed by Top Glove nor made public at this juncture, sources indicate that Top Glove is aiming to raise up to US$1bn-2bn (RM4.1bn- 8.2bn based on US$/RM rate of RM4.14) from this listing.
Note that Top Glove is currently listed in both Malaysia and Singapore. Our channel checks reveal that a potential HK listing would take up to 6-9 months.
Top Glove Is Evaluating a Dual Primary Listing on HK Stock Exchange
To recap, Top Glove made a Bursa announcement yesterday that indicated its intentions to evaluate a dual primary listing on HK’s stock exchange.
Top Glove stated that the purpose of the proposed listing, if undertaken, is mainly to:
have a presence in a larger, more active and liquid stock exchange,
enlarge and diversify its investor base and
provide an alternate and larger fund raising platform.
5-10% Dilution to Top Glove's FY21-23 EPS Assuming US$1bn-2bn Is Raised
At this juncture, we are neutral on this matter as:
key details remain scarce and
this news has yet to be confirmed by Top Glove itself.
Assuming that Top Glove is aiming to raise up to US$1bn-2bn (RM4.1bn-8.2bn) from a primary HK listing, we believe that there could potentially be a 5.3-10% dilution to our current FY21-23F EPS. This is assuming that:
Top Glove will issue 460m-910m new shares at RM9.09/share,
no interest income from the IPO proceeds raised and
the cash is not used for any merger and acquisition (M&A) exercises.
Potential Funds Are Likely to be Used for Expansion Purposes
In our view, the funds raised from the potential primary HK listing will mainly be utilised for:
future capacity expansion plans or
potential M&A exercises.
To recap, Top Glove recently announced that it has earmarked up to RM10bn worth of capex over the next five years (FY8/21-FY8/26). This includes plans to raise its total glove production capacity by another 100bn pieces annually (currently 85.5bn pieces p.a.) as well as investments in other key areas such as automation, upgrades to workers’ facilities and acquisition of land bank for future expansion.
Reiterate ADD on Top Glove
We make no changes to our ADD call and Target Price of RM10.00 (17x CY22 P/E). We await further details on this matter. Note that we only peg Top Glove to its current 5-year mean despite the current favourable operating environment and robust earnings prospects, as we acknowledge that FY21F could potentially be a one-off exceptional year.
We continue to like Top Glove, as it is the key beneficiary of higher glove demand owing to COVID-19 given its position as the world’s largest glove maker.
Potential re-rating catalysts include:
swift resolution on the CBP ban placed on two of Top Glove’s subsidiaries,
better-than-expected demand for gloves and
higher-than-expected increase in selling prices.
Downside risks: discovery of a cure/vaccine for COVID-19, stiff pricing competition, and a spike in raw material prices.
Author:kltrader | Publish date: Tue, 13 Oct 2020, 9:57 AM
Following yesterday’s Conditional Movement Control Order (CMCO) announcement by the Malaysian government to be implemented in the Klang Valley and the state of Sabah due to the recent spike in COVID cases, Macquarie Equities Research (MQ Research) believes that the market impact of these restrictions would be limited due to the fact that businesses are still allowed to operate.
Event
The Malaysian government has imposed a Conditional Movement Control Order (CMCO) in the Klang Valley and the state of Sabah following the recent spike in COVID cases. Restrictions primarily apply to non-essential activities (see: CMCO conditions). Most importantly, businesses, including factories, will be allowed to continue operations subject to social distancing requirements. This is similar to the situation in May 2020, which allowed economic activity to rebound after the restrictive MCO of March/April.
Impact
Market impact limited. MQ Research sees these restrictions having minimal impact on the equity market, considering valuations in most sectors have already regressed to COVID lows earlier this year. With businesses allowed to operate, the negative impact on the earnings of listed companies should be minimal as evidenced by the positive commentary from corporates following the lifting of the MCO during their 2Q20 results briefings. Previously implemented COVID-mitigation measures (eg work from home) should also minimise operational disruptions. One cause for caution, is the (for now) lack of government-led stimulus, which was very strong during the last lockdown. This may be addressed in the 2021 budget, which will be expansionary. Furthermore, these restrictions are limited to the Klang Valley and the state of Sabah. A few other districts in Kedah have also had restrictions imposed in recent weeks.
Leadership change? Datuk Seri Anwar Ibrahim has stated that he will have an audience with the King on 13 October, where he aims to show that he has the support of a majority of the 222-member parliament. As MQ Research highlighted before, a strong majority in parliament will be a positive for the country and the economy. However, the final outcome may require a General Election to settle the matter once and for all, to avoid another change down the road if coalition members decide to shift their support. The spike in COVID cases following the recent Sabah state elections unfortunately does mean that a swift general election may be off the cards for at least a few months.
Outlook
MQ Research remains constructive on the market, seeing these restrictions as transitionary. As global news flow around a COVID vaccine gathers momentum, MQ Research would expect some rotation out of glove names (short-term beneficiaries of uncertainty) into laggard sectors such as banks (CIMB, RHBBANK) and reopening plays (GENM, MAHB). An ongoing move towards digitalisation of the economy should benefit telcos (TM). Exporters (SDPL, PCHEM) remain firmly in MQ Research’s top picks list and may receive a boost from volatility in the RM ahead of the US elections. MQ Research would also look for weakness in the construction/infra names (GAM, ECON, RANH) and Tenaga as buying opportunities – the former especially as the political situation settles down.
Author:kltrader | Publish date: Fri, 9 Oct 2020, 11:18 AM
Macquarie Equities Research (MQ Research) maintains its Outperform rating on Tenaga Nasional with an unchanged target price of RM15.20, following its recent review of the Janamanjung 5 plant issues. MQ Research attributes Tenaga’s share price weakness to constant foreign selling as well as environment, social and governance (ESG) concerns, while discussing Tenaga’s split of regulated business as the best solution.
Conclusion
MQ Research maintains an Outperform recommendation on Tenaga Nasional with an unchanged price-to-earnings ratio (PER) based price target of RM15.20 (15x 21E) following a review of MQ Research’s estimates. While the Incentive Based Regulations (IBR) support regulated earnings, issues with its Janamanjung 5 plant have led MQ Research to trim its generation estimates for 20E. However, Tenaga’s post-20E earnings and free cash flow generation are intact and supportive of MQ Research’s ongoing thesis of increased capital management initiatives ahead. These capital management initiatives, in MQ Research’s view, will be the key rerating catalyst for Tenaga’s shares which have been derated due to foreign ESG focused fund selling. At current levels, the shares at 10x 21E core PER offer an attractive and sustainable 7% dividend yield.
Impact
ESG selling weighing on valuations. Foreign ownership in Tenaga has fallen to 14.9% at end-Aug 2020 on what MQ Research believes to be a growing base of funds adopting ESG principles. While Tenaga, like other independent power producers (IPPs) in Malaysia bid to build plants whose fuel source are determined by the Energy Commission, the mere exposure to thermal coal has led to these funds having to unwind their positions. The best solution would be for Tenaga to be split into two listed entities – one with the regulated assets and one with the other entities, to allow the ESG focused funds to own the former, which generate RM4bn pa. If the former entity is valued similar to regional transmission and distribution assets, it would be worth RM64bn vs Tenaga’s current market cap of RM60bn. The current internal restructuring has enabled this move, in MQ Research’s view. The key is executing on the split at the listed level.
Capital management next. With collections now on track (96%), management has stated that it will once again look at the ability to return excess capital to shareholders. By MQ Research’s estimates, Tenaga has excess capital of RM11bn at it regulated business that can be utilised to pay special dividends. MQ Research’s current estimates build in 25sen (RM1.4bn) of special dividends in respect of FY20.
Earnings and Target Price Revision
Core profits for FY20/21/22 adjusted -4.5/0.0/+0.1% due to lower capacity payments for Janamanjung 5 in 20E. TP unchanged at RM15.20 (15x PER)
Price Catalyst
12-month price target: RM15.20 based on a PER methodology.
Catalyst: Announcement of special dividends during 4Q results (Feb21)
Action and Recommendation
Outperform maintained. Tenaga remains one of MQ Research’s top picks within Malaysia.
Author:kltrader | Publish date: Thu, 8 Oct 2020, 9:11 AM
Committed to ESG Compliance; Maintain BUY
Top Glove’s ESG risks are not unique for a glove manufacturer and it is leading the sector in establishing policies to mitigate these risks. In our view, ESG risk should fall over the years as it leverages on its strong balance sheet and invests in automation to reduce its labour dependency.
Maintain BUY on Top Glove with Target Price MYR9.53 (9x CY21E P/E; -1SD of 5Y mean as we expect earnings to taper post-CY21E).
Complying With International Standards
Since Jan 2019, Top Glove has attended to more than 100 external independent social audits, which were initiated by its customers. The social audits were carried out based on international standards, i.e. the Business Social Compliance Initiatives (BSCI) and Sedex Members Ethical Trade Audits (SMETA). Top Glove has been a SEDEX member since 2018.
Remediation Fees Underway
Following the Withhold Release Order (WRO) on Top Glove’s 2 subsidiaries by the US Customs and Border Protection (CBP) in mid-Jul 2020, Top Glove has made the following improvements:
A total of MYR136m (or 1% of our FY21 net profit) will be paid to its 11,300 migrant workers (c.90% of its total factory workers) which are entitled to the remediation fees. About MYR9m was paid in Jul-Aug 2020 and the balance MYR127m will be paid from Oct 2020 (over a period of 10 months);
The workers’ space at the hostels has been enlarged, to comply with Malaysia’s new minimum standard;
Ensures that workers wear personal protective equipment (PPE);
Strengthened its whistle blowing policy by adding hotline contacts between independent consultants and the migrant workers.
Withhold Release Order (WRO) Could be Lifted by End-2020
We understand that Top Glove has met all the expectations of the US CBP, save for the remediation fees. Hence, with the remediation fees underway, we think the WRO could be lifted by end-2020.
In the meantime, the gloves produced have been diverted to other markets and thus, there was no significant impact on Top Glove’s sales volume.
Author:kltrader | Publish date: Wed, 7 Oct 2020, 9:10 AM
Prospects for Top Glove remain highly attractive. An increased dividend payout frequency would allow for better rationalisation of distributed super-cycle earnings, with the possibility of a special payout in 2HFY21.
Meanwhile, plans to venture upstream would help Top Glove secure precious NBR supply over the longer run. In the meantime, the lifting of the WRO by the US CBP remains uncertain. That said, the impact to overall sales is negligible.
Maintain BUY on Top Glove. Target price: RM12.30.
Key Takeaways From Our Recent Conference Call With Top Glove's Management
We gathered that contracted nitrile glove ASPs are expected to be raised by 5% m-o-m for November to US$100/’000 pieces. Meanwhile, spot orders are being priced between US$140-150/’000 pieces heading into 2021. Latex glove ASPs are raised by 10% m-o-m for November to about US$50/’000 pieces.
The current shortage of nitrile rubber (NBR) has switched demand to latex gloves. Our channel checks suggest there is a possibility of larger latex ASP revisions going forward. This represents further upside to Top Glove’s latex ASPs.
Better dividend frequency with possibility of special payout.
Heading into FY21, Top Glove will be paying out a quarterly dividend. This represents a deviation from its usual semi-annual payout. Should Top Glove declare any special dividends, it would be in 3QFY21 at the earliest.
Based on the company’s dividend policy payout of 50% on our projected earnings, the implied dividend yield for FY21 is 7.7%. For every 10% additional payout, the dividend yield increases by 1.6%. That said, dividend yields would moderate to 2.1% and 1.2% in FY22-23 respectively.
Timeline on CBP agency lifting WRO remains uncertain but overall sales unaffected.
Top Glove announced a revision to its foreign worker remediation amount to RM136m. This is almost 3x higher than management’s initial expectation of RM53m. The deviation arises from official foreign government recruitment fees vs agency imposed fees, discovered only through an audit interview with its foreign workers. The lifting of the Withhold Release Order (WRO) on two of Top Glove’s subsidiaries now lies with the US Customs and Border Protection (CBP) with no indicative timeline.
That said, utilisation rates remain maxed out as demand remains robust with sales to North America contributing a healthy 20% to overall sales mix. The WRO issue has been alleviated with sales diverted through other subsidiaries unaffected by the WRO. Terefore, we believe the CBP agency lifting the WRO is a non-factor for now.
NBR shortage sees spike in costs…
Notably nitrile butadiene costs have been skyrocketing, rising by 15-20% m-o-m. Meanwhile, spot prices are close to 2-3x the usual ASPs. This is in line with our channel checks with China glove producer, Blue Sail.
Nitrile butadiene accounts for 30% of COGS for nitrile gloves. In return, nitrile gloves accounts for ~50% of overall revenue. For every 10% deviation from our nitrile butadiene assumption, our FY21 earnings will be affected by -1.2%.
...but building its own NBR processing facility; due in 2022.
In view of the tight NBR supply, Top Glove is looking to expand upstream into establishing its own NBR processing plant in Banting, Selangor. The plant is due for completion over two phases (Phase 1: 1Q22 and Phase 2: 3Q22). Upon completion, it is due to fulfil 50% of internal NBR requirements.
The capex outlay is estimated to be in the region of RM600m.
New Entrants to Glove Manufacturing Industry
Companies from other sectors have entered the glove manufacturing industry. Based on some preliminary information on public listed companies that have disclosed their capacity expansion, we should reasonably expect at least 14.9b pieces p.a. from these new entrants. This further excludes the likes of Kanger International, Titijaya Land, HLT Global and Inix Technologies that have declared the same intention but have not disclosed their capacity expansion plans.
However, we think the new entrants will likely struggle to secure already tight NBR supply – an issue already plaguing existing glove producers. Furthermore, it may take up to 1.5 years to complete the glove manufacturing facilities.
Lastly, by 2022, supply arising from new entrants which is estimated at 14.9b pieces p.a. represents 3.1% of global glove demand (485b pieces). Given the aforementioned factors, we think that the additional supply from these new entrants is not a concern for now.
Top Glove - Valuation & Recommendation
We leave our earnings forecasts for Top Glove unchanged until we gain visibility over ASPs after a vaccine discovery. Key downside risks include:
swift containment of the COVID-19 outbreak;
disruption to its production or supply chain caused by the COVID-19 outbreak; and
COVID-19 vaccine discovery.
Every -1% deviation from our RM4.30/US$ assumption translates into a 1.2% and 1.8% reduction to our FY21-22 EPS respectively.
Maintain BUY on Top Glove and target price of RM12.30, based on 13.0x 2021F PE, or close to -3SD of its 5-year forward PE mean. Our PE peg is well below the normalised mean PE peg of 24.5x as we believe it is tied to windfall peak earnings.
Upside to Top Glove's earnings has been increasingly factored in, and the risk-to-reward at this juncture is increasingly pronounced given the surge in share price. That said, our PE peg is reasonable as Top Glove is an established FBMKLCI component index constituent with a sublime earnings CAGR of 450% (FY19-21F).
Furthermore, its explosive q-o-q earnings growth over the next 2-3 quarters should catalyse valuations going forward. That said, sustained spot sales mix and narrowing latex glove prices to nitrile’s may represent further upside surprise to our earnings forecasts.
Author:kltrader | Publish date: Wed, 7 Oct 2020, 9:09 AM
Top Glove announced that it has revised its remediation sum to RM136m post the completion of the independent consultant’s verification work.
We assume this is a one-off payment and will not affect our FY21-23 EPS.
Reiterate ADD with unchanged Target Price of RM10.00 (17x CY22 P/E).
Raising Its Remediation Fee Payment to RM136m
Top Glove announced yesterday that it has revised its remediation fee (in respect to recruitment fees previously paid by the migrant workers to agents or other parties) to RM136m from RM53m previously. This is based on recommendations by its independent consultant post the completion of a comprehensive verification.
All necessary information has also been submitted to US Customs and Border Protection to achieve a swift resolution on the Withhold Release Order (WRO) implemented on two of Top Glove’s subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd, since 15 Jul 2020.
This Is to Compensate Up to An Estimated 11,300 Migrant Workers
Based on our channel checks, this revised remediation sum encompasses up to 11,300 of its current migrant workers from our estimate of a total existing 12,000 to 13,000 total foreign workforce. Top Glove also stated that its migrant workers will receive this remediation fee over the next 10 months from Oct 20 onwards.
Note that Top Glove had earlier made the first two remediation payments (RM4.4m each – totalling 6.5% of estimated revised remediation fee) in August and Sep 2020. Hence, the total remaining amount to be paid is about RM127.2m.
We Consider This a One-off Payment, No Impact on Our Core Earnings
Note that this revised remediation fee mainly accounts for the period prior to the Zero Cost Recruitment Policy that has been implemented since Jan 19. Hence, we will assume this is a one-off non-recurring payment and that it will not impact our core FY8/21-23 EPS forecasts.
For illustration purposes, assuming we account for the remaining RM131.6m payment (including RM4.4m paid in Sep 20) in our FY21 forecast, this will negatively impact our FY21 net profit forecast by 1.2%.
Expecting This to Expedite the Lifting of CBP Ban
We believe the announcement of the revised remediation fee should aid in expediting the lifting of the WRO slapped on both Top Glove’s subsidiaries. We also understand that Top Glove continues to be in active conversation with CBP to identify and mitigate any other outstanding issues that led to the implementation of WRO.
Even in a worst-case scenario where the WRO will only be lifted by end-CY20, we believe that this will not have a negative impact on Top Glove’s FY21-23F EPS estimates. This is because gloves exported to the US by both Top Glove’s subsidiaries (we estimate that US sales by both subsidiaries make up 12.5% of Top Glove’s FY8/20 sales) can be re-routed to other countries or markets on the back of the current acute shortage of gloves globally.
Reiterate Our ADD Call on Top Glove With Unchanged Target Price of RM10.00
No changes to our ADD call and Target Price of RM10.00 (17x CY22 P/E).
Note that we only peg Top Glove to its current 5-year mean in spite of the current favourable operating environment and robust earnings prospects as we acknowledge that FY21 could be a one-off exceptional year.
Nevertheless, we continue to like Top Glove as it is the key beneficiary of higher glove demand owing to COVID-19 given its position as the world’s largest glove maker.
Potential re-rating catalysts include:
swift resolution of the CBP ban placed on two of Top Glove’s subsidiaries,
better-than-expected demand for gloves, and
higher-than-expected increase in selling prices.
Downside risks: discovery of a cure/vaccine for COVID-19, stiff pricing competition, and a spike in raw material prices.
