Author:kltrader | Publish date: Thu, 14 Jan 2021, 10:12 AM
Malaysian Palm Oil Board’s data for December 2020 showed crude palm oil’s (CPO) stock-to-usage ratio (S/U ratio) declined to a record low level at 6.1%, largely driven by strong exports to China and India. MQ Research thinks that supply will remain tight for at least over 6 months and expects planters to book strong earnings in 1Q21. MQ Research’s estimates and top picks are under review, though Sime Darby Plantation has the highest CPO price leverage.
Key Points
Malaysian Palm Oil Board (MPOB) stock-to-usage ratio (S/U ratio) declined to 6.1%, a record low level
Tightening of S/U ratio was largely driven by strong exports to China and India in 2H20
MQ Research opines CPO price will remain more than RM3,000/mt until supply recovers in 2H21
Event
MPOB reported the December stats with inventory level of 1.27mn mt (-37% YoY). On a monthly average basis, CY20 inventory dipped to 1.7mn mt (-32% YoY). CY20 production volume declined to 19.1mn mt (-4% YoY), meanwhile CY20 exports volume declined to 17.4mn mt (-6% YoY) largely due to the COVID-19 demand disruption in 2Q20. All in all, the MPOB S/U ratio tightened to 6.1%, the lowest MQ Research has seen to date.
Impact
Elevated CPO price will hold at least until 1H21-end; demand already stable but supply side remains shaky. The sustained import volume from both China and India since June 2020 are strong signals that demand has stabilised after the COVID-19 disruptions. On the other hand, supply will likely remain tight, at least over the next six months due to i) labour shortage in Malaysia; ii) heavier-than-usual rain in Malaysia, which disrupts harvesting; iii) later fertiliser application in CY20 – results of higher production only to be seen nine months later. However on the flipside, factors ii and iii above are likely to boon production recovery in 2H21.
Unlikely to see planters monetising the high CPO price in 4Q20 results due to the wait and see approach from buyers. Year-to-date (YTD) CPO price averaged at RM3,669/mt vs. CY20 average of RM2,682/mt. The sudden price spike of >RM3,000/mt began in early Nov ‘20 and has inched higher since. MQ Research understands from the planters that they were unable to capture the high CPO price in 4Q20 as buyers took the wait and see approach, hoping for prices to taper off. However, as prices constantly trended upwards and CPO inventory began to run low, buyers have started to buy CPO at higher prices starting late December. As such, MQ Research would expect CPO players to post book strong earnings only in 1Q21, due to the higher realised price.
Based on new levy structure, at current price Indonesian CPO exporters are paying the highest levy bracket at USD180/mt. For context, the Indonesian government remains committed to keeping the B30 program to support CPO price, tipping the scale towards the domestic plasma farmers. Consequently, purchasing power recovery of the mass market would therefore be able to gain steam. Separately on domestic production, there are emerging signs of La Niña in the form of heavy rainfalls, which will likely weigh on nascent production recovery. As such, with broad-based improvement in fresh fruit branches yields still on shaky ground, price will likely remain elevated, in MQ Research’s view.
Outlook
MQ Research is reviewing its estimates and top picks – however MQ Research notes that in its coverage, Sime Darby Plantations (SIMEPLT) and London Sumatra have the highest CPO price leverage.
Author:kltrader | Publish date: Tue, 12 Jan 2021, 10:30 AM
Yesterday, the Prime Minister Muhyiddin Yassin announced stricter movement restrictions, as anticipated by Macquarie Equities Research (MQ Research) earlier. While this may have negative impact on 21E earnings growth, MQ Research believes investors should continue to focus on the reopening thematic while expecting that the general election may happen as soon as Covid19 cases are under control.
Event
Prime Minister Muhyiddin Yassin has announced that stricter movement restrictions, movement control order (MCO), will be re-introduced in six states effective 13 January 2021 for two weeks to break the sharp rise in Covid infections of late. As per MQ Research’s report, the spike in Covid cases and the movement restrictions were not unexpected and will have a negative impact on 21E earnings growth. However, MQ Research believes investors should continue to focus on the reopening thematic as the implementation of vaccines begins in February/March.
The withdrawal of support of two UMNO MPs for the PM and the likelihood of UMNO pulling support following its Supreme Council meeting on 31 January do suggest that Malaysia will go to the polls as soon as Covid cases are under control. The interim caretaker government scenario MQ Research highlighted is also likely under such a scenario.
Both of these are in MQ Research’s view widely expected and do not change MQ Research’s positive view on the Malaysian equity market for 2021, on the basis that growing vaccination of the population globally will be positive for both the economy as well as investor sentiment towards 2022. Low yields also support equity upside.
Impact
Movement restrictions to temper growth but brighter future to support share prices. The economic impact of this MCO is likely to be RM1bn/day or 0.9% of gross domestic product (GDP) over the two-week restrictions based on the experience of the MCO in Mar-May 2020. Unemployment is likely to see a spike in the near term, with some small and medium-sized enterprises (SMEs) likely to shut. This will temper market earnings growth expectations for 21E, although the impact on corporate earnings is likely to be less severe given steps taken through the earlier MCO to streamline costs and practices. Core industries including manufacturing, commodities, finance etc will continue to operate in states where the MCO has been reintroduced.
Banks’ asset quality: short-term pain, long-term gain. While incrementally negative for consumption-driven businesses, the incoming movement control orders are neither as broad nor as strict as last year’s April/May lockdowns. In particular, manufacturers will not be affected this time around. MQ Research expects banks to continue exercising forbearance for businesses adversely affected by the lockdowns – delaying impaired loans recognition. Overall, MQ Research anticipates that the banking sector will take sufficient provisions in FY20, pointing to sequentially lower provisions on FY21 with less downside risk. It is also crucial to note that businesses will also suffer if daily infection numbers continue to climb and that curbing infections is beneficial in the longer term. Reiterate RHB as MQ Research’s top pick in the sector.
Outlook
MQ Research continues to favour companies geared towards an opening up of the economy in a post-Covid world. MQ Research’s top picks favour opening up plays (MAHB, GENM), exporters (PCHEM, SDPL), selected banks (RHBBANK, CIMB) and increased digitalisation (GHLS, T, MAXIS).
Author:kltrader | Publish date: Fri, 8 Jan 2021, 9:30 AM
Macquarie Equities Research (MQ Research) reduced its target price (TP) on Tenaga by 20% to RM12.20 (16% above yesterday’s close) and cut its 2020/21/22E core profit estimates by 16.0%/8.7%/-5.5% respectively due to Tenaga’s update on the delayed split in its generation and regulated businesses. Nonetheless, MQ Research maintains an Outperform rating and foresees that the split would take place in 2021/22 vs Tenaga’s 2-3-year timeline as stated in its 3Q20 results.
Key points
Delayed split set to hurt shareholdings and valuations; MQ Research ascribes 20% environmental, social and governance (ESG) discount to previous 15x price-earnings based target for generation ops split.
RM33bn international renewable energy asset target doesn’t change dividend theme.
MQ Research cuts 2020/21/22E core profit -16.0/-8.7/-5.5%; TP cut 20% to RM12.20.
Event
Management’s clarification that it will take Tenaga 2-3 years to physically split its generation and regulated businesses suggests that the combined entity will continue to attract an ESG discount until the exercise is completed. In the meantime, efforts to right-size its under-leveraged balance sheet should see special dividends supporting overall dividend yields, at 6.5%, even as Tenaga embarks on a 5-year strategy to expand its international renewable energy (RE) exposure to 5GW. MQ Research maintains Outperform recommendation on Tenaga, albeit with a reduced price-to-earnings ratio (PER) derived price target of RM12.20, as MQ Research incorporates a 20% ESG discount to its target PER (previously 15x).
Impact
ESG drag to persist. Delays in separating its generation operations – as management awaits capital allowances for two hydro plants and the debt novation of a gas plant – will prolong ESG-related discounts placed on its shares, in MQ Research’s view. MQ Research has ascribed a 20% PER discount to its previous target PER of 15x to account for this, resulting in a target market cap of RM69bn. A separation of the generation business from the “ESG friendly” regulated business would, in MQ Research’s view, allow for a combined value of RM87bn based on regional peer valuations for generation and transmission & business (T&D) businesses. There has been a clear underperformance of power sector players with exposure to thermal coal vs their “cleaner” peers. MQ Research expected this split to take place in 2021/22 vs management’s 2-3-year timeline stated during 3Q20 results.
RE push doesn’t change capital management thesis. Management’s aim of 5GW of international renewable energy (RE) capacity, worth RM33bn, contributing RM2bn in earnings before interest and taxes (EBIT) by 2025, does not change MQ Research’s thesis around Tenaga returning excess capital to shareholders – and helps its ESG situation. Assuming a 50% equity stake in these projects, with 70% debt funding, the cash outlay would be RM5bn over the period. Given the competition in RE, achieving this aim will not be easy.
Earnings and target price revision
MQ Research reduces its core profit 20/21/22 estimates by 16.0/8.7/5.5% on lower subsidiary revenues and higher opex and net finance costs. TP cut by 20% to RM12.20 on a lower target PER (15x to 12x) as we roll forward to 2022E.
Price catalyst
12-month price target: RM12.20 based on a PER methodology.
Catalyst: Special dividends to be announced with 4Q20 results in Feb 21.
Action and recommendation
Maintain Outperform, with an implied 24% total shareholder return (TSR).
Author:kltrader | Publish date: Wed, 6 Jan 2021, 11:50 AM
Happy New Year to all investors! Our daily newsletter resumes from today.
Bank Negara Malaysia (BNM) has released banking system data for November 2020, providing the second post-moratorium data point. There were some encouraging data as repayments remained stable and consumption remained resilient along with the healthy growth in CASA despite the resumption of loan payments. Macquarie Equities Research (MQ Research) maintains RHB Bank as its top banking stock pick while expecting Public Bank and Hong Leong to remain buoyant.
Key Points
Bank Negara has released banking system data for November 2020.
Post moratorium repayments held steady for the 2nd month; loan growth dipped to 3.8% year-on-year (y/y) despite a healthy consumer loan appetite.
Consumption remained resilient with +1.1% month-on-month (m/m) in credit card spend. Impaired loans creeping up across all segments to 1.53%.
The Positive
November banking stats provided a second post-moratoria data point. Repayments remain stable at ~90% of pre-Covid levels, with a slight sequential dip (partially) explained by increased take-up of opt-in repayment assistance. Credit card spend is a useful proxy for consumption, and the +1.1% sequential improvement was encouraging considering the Conditional Movement Control Order (CMCO) restrictions remained unchanged in November. Further emphasising the consumer resilience is the sustained strength in applications for consumer loans. The recent extension of the sales tax exemption on completely knocked down (CKD) vehicles till mid-2021 should help sustain the aforementioned demand.
Overall, the banking system remains liquid with an 88.3% loan-to-deposit ratio and a liquidity coverage ratio of 150%. Furthermore, current account savings account (CASA) growth remains robust (+23% y/y) despite the resumption of loan repayments. The sector CASA ratio has risen to a record high 30.7%, as borrowers eschew fixed deposits in the low-interest rate environment. This has helped stabilise banks’ margins following the 125bps interest rate cuts seen in 2020. Capital ratios remain more than ample with a common equity tier 1 (CET1) of 14.5%.
The Negative
As expected, loan impairments began to rise in November (+6.9% m/m) following the cessation of the blanket moratorium, with gross impaired loans (GIL) rising to 1.53%; historically still very low. While overall impaired loans ratios remain relatively low, gross impaired loans rose sharply vs a very low base: Auto +30% m/m, Housing +19% m/m, unsecured lending +18% m/m, and share financing +13% m/m. Nonetheless, this is not yet alarming given loan impairments were effectively frozen throughout the 6-month automatic moratorium.
While consumer loan demand was robust, non-consumer loan applications remained relatively soft, despite a modest sequential improvement in November. MQ Research anticipates the asymmetrical recovery in the economy, coupled with increased risk aversion from banks, will cap non-consumer loan growth in 2021. Corporate loan growth fell to +2.1% y/y diverging from retail loan growth of +5% y/y.
Outlook
MQ Research reiterates RHB Bank (RM6.35 TP, OP) as its top pick, affirmed by the recent announcement of an interim dividend of 10 sen/share (25% payout on 9M20). MQ Research expects loan impairments to accelerate in coming months. But with ample provision front-loading in FY20, MQ Research expects the market will focus on post-Covid return on equity (ROE)/valuations for the banks. Thus, MQ Research anticipates the sector will remain relatively buoyant, especially quality names like Public Bank and Hong Leong Bank.
Author:kltrader | Publish date: Fri, 11 Dec 2020, 9:31 AM
In a report dated today, Macquarie Equities Research (MQ Research) remains constructive on banks into 2021 although upside has narrowed following a sharp rally in recent weeks. MQ Research notes that Malaysian banks are still trading 12% below trailing three-year price to book and there is still potential upside on the bull case if value rally persists through 2021.
Conclusion: There is still upside for banks
MQ Research remains constructive on banks into 2021, even if upside has narrowed following a sharp rally in late-2020. MQ Research reiterates RHB and CIMB as its top Outperform picks, and upgrade Public to Outperform as its big-cap recovery play. MQ Research downgrades HLBK to Neutral following recent share price strength, maintain Maybank as Neutral but downgrade AMM to Underperform. MQ Research expects interest margins to recover in the next few quarters, as the excess system liquidity will substantially offset the lower benchmark interest rates (-125bps in FY20). Credit costs will remain elevated in FY21, with peak impairments only expected in late-2021/early-2022. Nonetheless, FY20 should mark rock bottom for banks’ provisions. Consumer borrowers have proven substantially more resilient than initially feared, underpinned by manageable stress to the labour market. Blanket moratoria, a key idiosyncratic risk to Malaysian banks, is highly unlikely to see a return following the policy shift to (opt-in) repayment assistance targeted to low-income households (B40).
The bottomed-out provision expectations have been a key catalyst for the recent value rally. MQ Research expects two more catalysts: 1) over the next 12-18 months, improving visibility in the macroeconomic outlook (vaccine deployment, political impasse resolved) will be the primary driver; 2) by mid-late CY22, MQ Research expects the discussion on interest rate hikes to begin in earnest as unemployment starts to fall back to pre-COVID levels.
Valuation/Earnings
MQ Research adjusts key Gordon growth model inputs across the banks. A low interest rate environment and scepticism on banks’ ability to structurally reduce costs leads MQ Research to trim long-term sustainable return on equities (ROE) assumptions. However, the lower ROE impact is offset by a post-crisis capital release (especially with RHB) as well as lower cost of capital assumptions arising from the low-interest rate environment.
MQ Research upgrades aggregate sector earnings by +14%/+8% for FY20/21. Incremental provision downgrades were far outweighed by better non-interest income assumptions from trading in FY20E, as well as quicker net interest margin recovery. MQ Research also removes a -25bps overnight policy rate (OPR) cut from its assumptions (previously assumed -150bps cuts in FY20) and lowered costs in FY20/21.
Outlook
MQ Research expects the market to look past the short-term volatility to banks earnings, and focus on business-as-usual ROEs in a post-COVID world. While MQ Research expects the lower interest rate and lower growth environment will trim ROEs, it has also driven down the cost of capital substantially. See MQ Research’s article on Malaysia Strategy as summarized in the daily highlights dated 7 December 2020.
Author:kltrader | Publish date: Thu, 10 Dec 2020, 6:13 PM
Top Glove's 1QFY21 earnings beat consensus expectations. The surge in raw material cost was well absorbed by still-rising ASPs.
Management expects full production to resume in a matter of weeks, following the untoward COVID-19 outbreak among its foreign workers. Similarly, US CBP’s withhold order is expected to be resolved soon as well.
ASP outlook remains robust and we should reasonably see a step change in earnings.
Maintain BUY on Top Glove with target price of RM12.30.
Top Glove's 1QFY21 Earnings
Top Glove (SGX:BVA)’s 1QFY21 core net profit of RM2,560m (+98% q-o-q, +2,198% y-o-y) was within our expectations but surpassed consensus’, accounting for 23% and 30% of full-year estimates respectively. Heading into the quarters ahead, we expect still-robust ASP revisions to increase earnings significantly q-o-q. Overall demand visibility remains highly robust.
An interim dividend of 16.5 sen was declared, representing a dividend payout of 56% or 6% above Top Glove's dividend payout policy of 50% (1QFY20: 1.3 sen).
Blockbuster revenue growth sustained.
Top Glove's revenue grew 53% q-o-q (+294% y-o-y) to RM4,759m in 1QFY21. This was attributed to:
blended ASP rising by 57% q-o-q;
US$/RM rate sliding by 2.3% q-o-q; and
flattish volume growth arising from the enhanced movement control order (EMCO) implemented on Top Glove’s operations arising from the COVID-19 outbreak.
Despite the steep ASP hike in the quarter, we continue to expect further ASP hikes to be sustained into 2QFY21.
Spike in nitrile cost well absorbed by steep ASP hikes.
EBITDA margin expanded to 66.1% against significantly higher ASPs. Margins were slightly tempered with raw material costs seeing step changes in cost.
Latex and nitrile costs came off a low base and grew 13% and 39% y-o-y respectively against unfavourable forex (-2.3%). Net margin was further tempered to 49.9% by a higher effective tax of 22.3% (4QFY20: 18.3%).
Visibility for Near-term Earnings Windfall for Top Glove Remains Intact
We gather December-February nitrile ASPs would be raised by 15%, 10% and 5% m-o-m respectively. Meanwhile, latex glove ASPs would be revised by 5% m-o-m throughout 2QFY21.
On a quarterly basis, 2QFY21 blended ASPs are expected to be up 30% q-o-q. The still-uptrending ASPs should result in step changes in earnings over the coming two quarters.
Similarly, spot 2QFY21 ASPs are expected to be priced in the region of US$140-150/’000 pieces (1QFY21: US$120/’000 pieces). Despite our expectations for quarterly earnings to peak in 3QFY21, the likes of its peers such as Supermax pricing its spot ASPs at ~US$200/’000 pieces represents upside to our expectations.
Light at the End of the COVID-19 Outbreak Tunnel
Recall that 20 of Top Glove's glove manufacturing factories have been placed under EMCO since mid-November. This accounts for 50% of production. Overall, on a group level, we gather that current utilisation rate is close to 60%. Thus far, ~5,000 of 8,868 workers have tested positive for COVID-19. However, 90% have been cleared fit to work. As such, management expects a gradual resumption of production over the following 2-3 weeks, before achieving optimised utilisation rates in early-21.
Could Sentiment See An Additional Boost From the Lifting of the WRO?
In relation to Top Glove’s Withhold Release Order (WRO) or a detention order on gloves manufactured by Top Glove, issued by the US Customs and Border Protection (CBP), management believes it is at the tail end of resolving the issue. This would allow Top Glove to fully resume sales to the US that previously saw restriction on two subsidiaries. As a result of the WRO, 1QFY21 US volume sales declined by 2% y-o-y.
While the earnings impact is negligible, we think that the lifting of the WRO would improve sentiment as it positively affirms Top Glove’s labour practices.
Lucrative Special Dividend From Top Glove in FY21?
While Top Glove has not declared a special dividend, we do not rule out a special dividend in FY21, given its anticipated windfall earnings.
Based on the Top Glove’s dividend policy payout of 50% alone, the implied dividend yield for FY21 is 9.8%.
For every 10% additional payout, the dividend yield increases by 2.0%. That said, dividend yield would moderate to 2.7% and 1.5% in FY22-23 respectively.
Top Glove - Earnings Forecast
We leave our Top Glove's earnings forecasts unchanged for now until we gain further visibility over ASPs.
Key downside risks include:
swift containment of COVID-19 outbreak; and
disruption to its production or supply chain caused by the COVID-19 outbreak.
Every -1% deviation from our RM4.10/US$ assumption translates into 1.2% and 1.8% declines to our FY21-22 earnings respectively.
Top Glove - Valuation & Recommendation
Maintain BUY on Top Glove with target price of RM12.30, based on 13.0x 2021F PE, or close to -3SD of its 5-year forward PE mean. It is at a significant discount as we believe valuations are being pegged to windfall peak earnings, upside to earnings is increasingly being 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 with sublime earnings growth.
Author:kltrader | Publish date: Thu, 10 Dec 2020, 12:20 PM
Estimate Top Glove's FY21-23E P/E of 5x/9x/18x; Maintain BUY
Top Glove's 1QFY21 (Sep 2020 to Nov 2020) core net profit (+2x q-o-q) beat street’s expectations.
We expect a stronger 2QFY21 on ASP hike of 30% q-o-q and flattish sales volume. We maintain our FY21 earnings forecast but raise our FY22-23E earnings forecast by 50%/73% on higher ASPs.
We derive our new target price of MYR8.65 (-9%) based on DCF methodology (from P/E), which assumes for WACC of 8.2% (higher than our assumed WACCs for other glove players as we account for its social compliance issues) and LTG of 4.5%.
Top Glove's estimated dividend yield of 11%/6% in FY21- 22 is also attractive.
Top Glove's 1QFY21 Within Ours But Above Street’s Expectations
Excluding the contribution to government’s COVID-19 fund (MYR185m), Top Glove's 1QFY21 core net profit of MYR2.56b (+2x q-o-q, +23x y-o-y) accounts for 23% and 31% of our and street’s full-year forecasts.
A first interim dividend of 16.5sen was declared (in line with its latest quarterly dividend payout policy) and the profit payout of 56% is higher than its payout policy of 50%.
Also, Top Glove's net cash swelled to MYR3.44b (from MYR1.04b as at Aug 20).
Top Glove's 1QFY21 Key Takeaways
Key takeaways from Top Glove's 1QFY21 results:
Revenue grew 53% q-o-q as the higher ASP (+56% q-o-q) outweighed the lower USD vs. MYR (-2% q-o-q).
Sales volume was flattish q-o-q as the capacity growth (+c.13% q-o-q) offset the 2-week shutdown-led lower plant utilisation rate of 85% (4QFY20: 96%). Additionally, nitrile sales volume fell 8% q-o-q due to shortage of NBR raw material supply;
EBITDA margin jumped to 70% (4QFY20: 54%) given the higher ASPs.
ASP and Cost Trends
ASP hikes still ongoing
For Jan 21, the ASP for nitrile gloves is increased by 10% m-o-m while the ASP for latex gloves is increased by 5% m-o-m. As for Feb 21, management guided that the ASP hike could be around 5% m-o-m given the higher base now.
Meanwhile, the average spot price for nitrile gloves remains high at USD140- 150/k pcs, with some of the spot orders in Jan-Feb 21 at a higher spot price of USD180/k pcs. As for the latex powder free gloves, the spot price is also higher at USD85/k pcs now (from USD75/k pcs previously).
As such, Top Glove's management has guided for its blended ASP in 2QFY21 (Dec 2020 - Feb 2021) to increase by 30% q-o-q.
Raw material cost spiked but still manageable
Given the shortage of the NBR latex, the NBR price has jumped to USD2,500/t presently (+2.6x from the bottom in Apr 20) and may continue to rise until new NBR capacity comes on stream in 2H21. Assuming the NBR cost increase at a rate of 20% m-o-m, we estimate that Top Glove's’s NBR cost could increase 80% q-o-q in 2QFY21.
As for the natural latex cost, due to the heavy rain in Thailand, it has spiked up to MYR7.50/kg in end-Oct 20 (+86% from the bottom in Apr 20). However, the price has since retreated by 20% to MYR5.90/kg presently on the normalisation of weather. Assuming the natural latex cost stays at current level, the latex cost would be just 4% higher q-o-q in 2QFY21.
Though NBR cost is at a premium to that of latex, the margin of nitrile gloves remains superior to that of latex as nitrile gloves ASP is around 70% higher than that of latex powder free gloves. Hence, Top Glove's would increase its nitrile glove production in 2QFY21, in order to maximise its profit.
Our Earnings Forecasts
We maintain our Top Glove FY21 earnings forecast and raise our FY22-23 earnings forecast by 50%/73% respectively. This is largely premised on higher ASP assumptions as we raise our FY22-23E blended ASPs by 34% and 28% respectively, to be in line with our ASP assumptions for Hartalega and Kossan.
In contrast, the glove players, such as Top Glove, are projecting for demand to outstrip supply for the next 3 years.
We now project for its blended ASP to jump 3.1x in FY21E and to fall 32%/27% in FY22-23E as the new supply could catch up with demand.
In view of the rising raw material costs, we also raised our NBR cost assumption by 75%/57% in FY22-23E and latex cost assumption by 18% p.a. in FY22-23E.
Author:kltrader | Publish date: Wed, 9 Dec 2020, 6:11 PM
We deem Top Glove's 1QFY21 net profit of RM2.6bn (+2,198% y-o-y) to be in-line at 24.7% of our FY21F estimate but above Bloomberg consensus.
Top Glove should record stronger results in quarters ahead, backed by:
higher ASPs,
increase in production capacity, and
higher economies of scale.
We reiterate our ADD call for Top Glove with a lower target price of RM8.90 (16x CY22 P/E).
Top Glove's 1QFY21 Core Net Profit Rose 2,198% Y-o-y; Within Expectations
Top Glove's 1QFY21 (Aug 2020 to Nov 2020) core net profit jumped 2,198% y-o-y to RM2.6bn, after adding back the one-off donation of RM185m to the government’s COVID-19 fund. We deem 1QFY21 net profit to be in-line with our full-year estimates but above Bloomberg consensus’ (29.7%).
In 1QFY21, Top Glove declared its first interim dividend of 16.5 sen per share. This represents 56% payout (50% usual dividend policy + 6% special), i.e. above our expectations.
Higher Sales Volume and ASP Hike Due to COVID-19
Top Glove's 1QFY21 revenue rose 293.7% y-o-y due to higher sales volume (+34% y-o-y) and surge in ASPs (+201.8% y-o-y). Thanks to margin expansion and better economies of scale, 1QFY21 EBITDA margins rose 54.1% pts y-o-y to 70.2%, despite higher raw material prices (nitrile latex: +24% y-o-y, natural rubber: +18% y-o-y).
Top Glove's 1QFY21 core net profit surged 2,198.2% y-o-y to RM2.4bn, despite incurring a higher tax rate of 22.3% (+11.4% pts y-o-y).
Stronger Q-o-q Results Were Mainly Thanks to Higher ASPs
1QFY21 revenue rose by 53.1% q-o-q and net profit by 83.9% q-o-q. This was thanks to higher ASPs (+57% q-o-q), which more than offset a weaker US$/RM (-2% q-o-q) and rise in raw material prices (nitrile latex: +39% q-o-q, natural rubber: +13% q-o-q).
We understand that Top Glove's 1QFY21 sales volume was flattish on a q-o-q basis, given the impact of the first two weeks of the EMCO (17 Nov – 14 Dec 20) on all of its Meru, Klang plants (50% of total capacity) that occurred towards end-1QFY21.
Expecting Its Meru Plants to be Operational on a Gradual Basis
Since 24 Nov, TOPG temporarily stopped all of its manufacturing facilities (28 plants – 50% of TOPG’s total capacity) in Meru, Klang. This is in tandem with the implementation of EMCO on TOPG’s worker dormitories in Meru, Klang and to allow for further COVID-19 screening and quarantine of its workers. We gather that TOPG has already commenced operations at seven plants, with plans to recommence operations at seven plants a week for the next three weeks.
Reiterate ADD With a Lower Target Price of RM8.90
We cut our Top Glove's target price to RM8.90, based on 16x CY22 P/E, -0.5 s.d. of its 5-year mean (previously 17x P/E). The lower P/E is to account for ongoing concerns on ESG-related issues, particularly related to its foreign workers.
Nevertheless, we still like Top Glove as it is the key beneficiary of higher glove demand due to the COVID-19 pandemic, given its position as the world’s largest glove maker.
Other Briefing Highlights
Top Glove expects ASPs to rise 30% q-o-q in 2QFY21, on the back of the strong global glove demand and also to pass on the higher raw material prices.
Top Glove continues to see very strong order lead time, i.e. an average of one year across all product types. While there has been a decline in order lead time in comparison to 4QFY20, this was attributed to cancellation of orders from traders (due to sharp rise in ASPs) as well as increase in production capacity to fulfill the increase in demand.
We understand that Top Glove has been actively working with the US Customs and Border Protection (CBP) to address all the issues with regards to forced labour that were raised, and is confident of a swift resolution to the matter in the near term.
Top Glove will continue to invest in improving its workers hostels, by earmarking RM100m capex for this purpose. Besides acquiring more existing houses and apartments in the areas which the company operates in (earmarked RM30m in the next few years), Top Glove also plans to build two large scale hostels, one in Klang and one in Bangi, which can host 4,200 and 3,100 workers respectively.
Top Glove also highlighted plans to continue to hire more local employees, as it targets to hire up to 9,000 local workers in FY21. This is to reduce reliance on foreign workers while creating more job opportunities for local residents.
With regards to the COVID-19 outbreak among its workers in Meru, Klang area, Top Glove highlighted that it has tested a total of 8,868 workers in the area. We understand that 58% of them (5,147) tested positive for COVID-19, but 90% of them (4,636) have been released from hospitals and are certified as fit to work. As such, up to 94% (8,357) of its workers are ready to resume work after the quarantine period.
Top Glove believes that global glove demand will continue to outstrip supply for the next three years at least. This is given that Top Glove does not expect the incoming new glove supply globally to be able to cater for the increase in global glove usage patterns.
Top Glove does not expect the rollout of COVID-19 vaccines to lead to a decline in glove usage. On the contrary, Top Glove expects an increase in glove demand in tandem with higher usage due to more COVID-19 testing activities and the administration of COVID-19 vaccines.
Potential Re-rating Catalysts and Downside Risks
Potential re-rating catalysts:
swift resolution of the US CBP ban placed on two of Top Glove’s subsidiaries,
better-than-expected demand for gloves, and
higher-than-expected rise in selling prices for gloves.
Downside risks:
a prolonged closure of Top Glove’s manufacturing facilities in Meru, Klang,
faster-than-expected rollout of COVID-19 vaccine, and
Author:kltrader | Publish date: Mon, 7 Dec 2020, 9:31 AM
Macquarie Equities Research (MQ Research) said 3Q20 saw widespread recovery in earnings. Although 4Q20 is likely to be weaker due to the CMCO since mid-October, outlook for 2021 remains positive with MQ Research’s FBM KLCI target at 1,780, led by banks, telcos, exporters and recovery plays.
Event
The 3Q20 results season saw a widespread recovery in earnings, and economic activity picked up post the restrictions in 1H20. In fact, the rebound in a number of sectors, including banks, was better than expected on muted expectations. While the Conditional Movement Control Order (CMCO) since mid-October will weigh on 4Q results, MQ Research believes the market is already beginning to position for a post COVID-19 recovery in 2021.
While the path ahead is likely to be marred by further restrictions, etc., the improving outlook for the availability of COVID-19 vaccines in 2021 will be a multiple-re-rating catalyst for equities in 2021, in MQ Research’s view. MQ Research’s end-2021 KLCI target of 1,780 (17x 22E PER) offers 11% upside, with outperformance likely to come from stock picking.
Impact
Tempered 4Q20, better 2021. While 3Q20 results could have warranted further upgrades to estimates, the ongoing CMCO (currently until 6 December), will temper 4Q20 earnings. The market is looking past this, and MQ Research currently estimate KLCI’s earnings per share (EPS) to jump 45% in 21E, following a 14% decline in 20E. Further movement restrictions or earnings risks for 2021 cannot be discounted, but the availability of vaccines should support multiple expansion.
Banks: Low rescheduling and restructuring. Four of six banks under MQ Research’s coverage beat its expectations, as trading income and cost controls helped drive pre-provisioning operating profits (PPOP). While credit cost guidance was downgraded, it mostly fell within expectations, and despite the negative impact of CMCO-induced uncertainty, it was outweighed by the lower-than-expected repayment assistance of 10% (vs Malaysia book) post-moratoria. Banks are guiding credit costs more confidently; may peak in 4QCY20 results (Feb 2021).
Things to watch out for. While COVID-19 will turn from a headwind into a tailwind in 2021, one cannot ignore the potential pitfalls in 2021. Equity raises would be the first and foremost. The transport, construction and property sectors are potentially at risk here. Environmental, social and governance (ESG) related issues are also likely to make headlines, with the recently established Act 446, which focuses on workers’ welfare. Manufactures and plantations are potentially at risk.
Outlook
MQ Research remains constructive on the Malaysian equity market in 2021, with banks (CIMB and RHBBANK), digitalisation plays (T, MAXIS and GHLS), exporters (SDPL and PCHEM) and reopening plays (GENM and MAHB) firmly in MQ Research’s top picks list. News flow on infra projects is likely to gather momentum post elections (earliest mid-1H21), leaving GAM as MQ Research’s preferred exposure. The one sector MQ Research believes will drag index upside is gloves, where MQ Research sees a moderating average selling price (ASP) outlook on vaccine availability dragging share prices, even as record profits are registered.
Author:kltrader | Publish date: Fri, 4 Dec 2020, 6:50 PM
3Q20 below expectation, swing to red on lower revenue and Forex loss
TWPH 3Q20 posted lower revenue RM64.8m (yoy:-22.3%, qoq:-11.7%) and LAT of RM1.0m (yoy:-RM2.6m, qoq:+RM0.2m). Nine (9) months cumulative results disappoint revenue and PATMI of RM222.4m and RM1.3m only accounted for 56.5% and 16.0% of our forecast respectively.
Revenue for the quarter was affected by lower demand in certain cigarette brand related packaging products impacted by the Covid-19. Management actively taking cost saving measure and would have reported profitable quarter if not for net foreign exchange loss of RM2.5m.
Recovery 2020 hampered by Covid-19, focus on cost saving measures
Management’s effort to combat the adverse impact by Covid-19 is commendable which has prevent loss widen albeit revenue dip however given the challenging outlook and low earnings visibility, we maintain sell recommendation with unchanged TP at RM 0.84 pegged at P/B of 0.4x of FY20F NTA for TWPH.
