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Author: kltrader   |   Latest post: Wed, 28 Oct 2020, 9:15 AM

 

Top Glove - Only a Sneak Preview to Upcoming Quarters

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  • Top Glove's 4QFY20 earnings soundly beat expectations amid higher ASPs and spot sales kicking in. The CBP withhold order was well navigated with little impact. Demand remains visible with lengthening delivery lead times and robust demand from COVID-19 contained countries.
  • Robust nitrile ASPs, expected narrowing price gap between latex ASPs and nitrile ASPs, and resolving of the CBP withhold order would well justify the surge in valuations.
  • Maintain BUY and target price of RM12.30.

Top Glove's 4QFY20 Results Well Above Expectations

  • Top Glove’s 4QFY20 core net profit of RM1,292m (+271% q-o-q, +1,514% y-o-y) surpassed expectations, accounting for 114% and 122% of our and consensus full-year estimates respectively.
  • Heading into the quarters ahead, we expect still robust ASP revisions and latex ASP catch-up to increase earnings significantly q-o-q. Overall demand visibility remains highly robust.
  • An interim dividend of 8.5 sen was declared (4QFY19: 1.3 sen).
  • Blockbuster revenue growth of 84.2% q-o-q (+161% y-o-y) to RM3,109m in 4QFY20. This was attributed to:
    1. blended ASP rising 80% q-o-q;
    2. USD/MYR down 1.0% q-o-q; and
    3. volume growth of 5% q-o-q.
  • Capacity expansion should contribute to a 3% growth in the subsequent quarter. Futhermore, despite the steep ASP hike in the quarter, we continue to expect further sharp ASP hikes to be sustained up till this year-end.

Higher Cost Slightly Tempered Steep ASP Hike

  • EBITDA margin surged to 53.9% on the back of significantly higher ASPs. Margins were slightly tempered with raw material costs seeing an uptick. Latex and nitrile costs coming off a low base to grow 11.8% and 9.8% y-o-y respectively against unfavourable forex (-1%). Net margin was slightly tempered to 41.6% by a higher effective tax of 18.3% (3QFY20: 17.1%).

Shortage of NBR in the Market

  • We gather the nitrile butadiene rubber (NBR) production by Kumho, Synthomer and LG has reached their limit due to demand driven by glove producers as it is a raw material for making nitrile gloves. Additional production capacity for NBR to ease supply is only expected to kick in in late-21.
  • Chinese glove producers are said to be willing to pay a significant premium to secure NBR supply for its aggressive expansion into nitrile glove production.

NBR Squeeze Beneficiary: Top Glove

  • As demand switches over to latex gloves, the existing 50% ASP discount to nitrile gloves is expected to narrow considerably over the next 2-3 quarters. This would favour Top Glove as its latex production is 36% of overall production.
  • Meanwhile , Hartalega’s and Kossan’s latex production is minimal at < 5% of total production.

Earnings Windfall Visibility Still Robust

  • Step changes in earnings should be sustained over the coming two quarters. We gather Sep-Nov nitrile ASPs are raised by 30%, 30% and 15% m-o-m respectively. Meanwhile, we expect latex glove ASPs to catch up to nitrile ASPs, given the raw material shortage for nitrile gloves. The catch-up in latex pricing should further strengthen Top Glove’s q-o-q earnings growth into 2Q-3QFY20.

Lucrative Special Dividend 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 company’s dividend policy payout of 50% alone, the implied dividend yield for FY21 is 7.9%.
  • For every 10% additional payout, the dividend yield increases by 1.6%. That said, dividend yield would moderate to 2.2% and 1.0% in FY22-23 respectively.

Top Glove - Earnings Revision & Risks

  • We leave our earnings forecasts unchanged for now until we gain further visibility over ASPs.
  • Key downside risks include:
    1. swift containment of COVID-19 outbreak;
    2. disruption to its production or supply chain caused by the COVID-19 outbreak; and
    3. COVID-19 vaccine discovery.
  • Every -1% deviation from our RM4.30/US$ assumption translates into 1.2% and 1.8% drop to our FY21-22 EPS 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.
  • We have lowered our PE peg (from normalised mean PE peg of 24.5x) 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 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.

Source: UOB Kay Hian Research - 18 Sep 2020

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