Investment Highlights

• We maintain HOLD on Top Glove with a higher fair value of RM6.28/share (RM6.21/share previously). We have raised Top Glove’s earnings forecasts by 10% and 1% for FY20F and FY21F respectively to account for higher sales volume, a recovery of the latex gloves’ market share and lower raw material costs. Our valuation is based on a PE of 33x on FY21F EPS.

• The addition of the F2B (refurbishment) and F5A (new) plant would bring its total capacity to 73.4bil pieces by 3QFY20 (+4% QoQ). In total, Top Glove’s expansion plan includes an additional 8.2bil pieces (+16% YoY) by Dec 2020 and 9.5bil pieces (+12% YoY) by Dec 2021.

• Top Glove’s 1HFY20 net profit of RM227.1mil (+5% YoY) was in line with both our and street’s expectations, making up around 47–48% of earnings forecasts.

• Top Glove’s 2QFY20’s QoQ revenue grew 2% to RM2,439mil. The 11% QoQ increase in the volume of latex gloves can be attributed to a recovery in market share resulting from aggressive marketing. EBIT margin also improved to 12.1% in 2QFY20 from 11.7% in 1QFY20 due to higher ASP of latex gloves (+3%).

• 2QFY20 YoY revenue grew 6%. Higher sales volume of nitrile gloves (+14%) more than compensated for a 6% drop in the sales of latex gloves resulting from increased competition.

• EBIT grew at a slower 3% in 2QFY20 compared with the revenue growth of 6% as the group suffered higher latex price. The 19% increase in latex price could not be fully passed on as the increase in selling price was only 9%. ASP of nitrile gloves declined by 3% in tandem with 7% cheaper nitrile prices.

• Top Glove’s net margin improved slightly (+0.3ppt) in 2QFY20 due to a lower effective tax rate (11% from 15% previously) as the group utilised tax incentives from its ongoing expansions.

• Top Glove’s 1HFY20 revenue rose 1% with 0.6% higher sales volume and flattish ASPs. Aspion’s surgical gloves sales volume shot up 29% with the group’s enhancement initiatives. Aspion contributed circa RM11mil to the group’s PBT.

• Latex product mix is now higher at 43% in 2QFY20 (39% in 1QFY20) as Top Glove regained some latex gloves’ market share. We believe this led to an EBIT margin contraction of 0.7ppt in 1HFY20 as latex gloves command lower margins compared with nitrile gloves.

• Top Glove said that during the initial stage of Covid-19, sales orders came mainly from China, Hong Kong, Singapore and South Korea. Recently, the group has received orders from Europe, the US and other countries. The group’s sales order book doubled following the rapid spread of Covid-19.

• We expect sequential improvement in Top Glove’s profitability as sales orders soar. The group will also benefit from increased capacity as its expansion plan progresses. We forecast Top Glove’s net earnings to grow by 44% in FY20F and net margin to improve to 9.8% from 7.6% on the back of stronger demand, weaker MYR against USD and lower commodity prices.

• However, assuming Covid-19 is contained within FY20F, we anticipate a slower sales growth in FY21F due to an excess supply of inventory. We forecast Top Glove’s net profit to contract by 8% in FY21F.

Source: AmInvest Research - 20 Mar 2020