Investment Highlights

• We maintain our HOLD call on Top Glove Corporation (Top Glove) with a higher fair value of RM6.21. We have raised our P/E multiple further to 33x (+3 SDs). Our valuation is now based on a P/E of 33x FY21F EPS. We have raised Top Glove’s FY20F net profit by 13.6%. However, we have lowered our FY21F and FY22F earnings forecasts for Top Glove by 3.0% and 2.4% respectively.

• We like Top Glove for its expansionary plans and position as the world’s largest glove manufacturer. However, it faces stiffer competition (compared with Kossan and Hartalega) as Thailand-based Sri Trang aggressively expands its latex capacity. We believe Top Glove’s PE is fully valued at 34.8x FY20 EPS compared to Kossan’s PE of 22.5x.

• The World Health Organization (WHO) has declared the coronavirus, Covid-19, a pandemic, urging governments to step up containment efforts as the number of worldwide cases topped 120K and deaths exceeded 4.3K.

• Recall that during the previous major pandemic outbreak, Top Glove’s earnings and share price increased. At the start of the 2009–2010 H1N1 pandemic, Top Glove’s share price was RM0.73 and it rose to RM1.80 in about 15 months, by the end of the pandemic as shown in Exhibit 1.

• Previously during the H1N1 pandemic, Top Glove’s revenue and net profit rose 36.0% and 38.6% respectively in FY10 as demand soared. This resulted in a 0.3ppt improvement in net margins (11.8% in FY10).

• We believe that orders for gloves during the outbreak were high as customers stock up more than usual as a pre-emptive measure. However, post-outbreak, there was an excess supply in the customers’ inventory which lowered sales growth. Top Glove’s revenue dropped 1.2% and net profit plunged 54.4% in FY11.

• Top Glove was hit by the shift in demand from latex gloves to nitrile gloves. Latex raw material price was also at an all-time high in FY11, reaching RM10.83/kg as shown in Exhibit 3.

• Top Glove’s 1-year average trading P/E was 11.2x before the WHO declared H1N1 as a pandemic. Its P/E peaked at 20.2x (+7.2 SDs) in April 2010.

• We believe that Top Glove will benefit from an expected increase in demand for gloves arising from the Covid-19 pandemic. We expect Top Glove to record higher sales volume in FY20F. Its performance will also be boosted by the contribution from its planned capacity expansion +16.8% in CY20F.

• We forecast Top Glove’s FY20F net earnings to grow by 31.4% YoY and net margin to improve to 8.7% from 7.6%.

• However, as the Covid-19 pandemic is expected to be contained in 2020F, we anticipate a slower sales growth in FY21F due to an excess supply of inventory. We forecast Top Glove’s net profit to grow by only 0.5% as net margin contracts by 0.4% in FY21F.

Source: AmInvest Research - 13 Mar 2020