nvestment Highlights

• We maintain our HOLD call on Top Glove Corporation (Top Glove) with an unchanged FV of RM6.28/share. Our valuation is based on 33x FY21F EPS.

• We continue to like Top Glove for its: (1) expansionary plans; (2) focus and continual efforts in improving quality and operational efficiencies; and (3) position as the world’s largest rubber glove manufacturer. However, as its share price has rallied over 33% YTD and it is currently trading at around 33x FY21F PE, we believe that the stock is fairly valued.

• We forecast Top Glove’s revenue and net profit to grow by 12% and 44% YoY respectively in FY20F underpinned by increased demand as the Covid-19 outbreak escalates. Top Glove’s production capacity is also expected to expand by 16% YoY to 81.6bil in FY20F. According to the company, its expansion plans remain and are minimally impacted by the movement control order (MCO).

• However, assuming the Covid-19 outbreak 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.

• In the 2QFY20 briefing conference call yesterday, Top Glove said that it is expecting demand to grow 16% QoQ in 3QFY20 as the Covid-19 outbreak escalates. As shown in Exhibits 1–3, Top Glove is estimating sales volume growth of 15% QoQ for latex gloves, 20% QoQ for nitrile gloves and flattish sales of vinyl gloves.

• Average selling price (ASP) is expected to grow 3.5% per month in April–June despite declining raw material prices and a weaker MYR against the USD.

• The group expects its net profit margin to expand by 20– 40% in 2HFY20 on the back of easing raw material prices, higher USD vs. the MYR, and higher utilization rate and ASP from increased demand in light of the Covid-19 pandemic. The pandemic has caused a shortage of supply as demand soars, exceeding available supply.

• Top Glove’s manufacturing plants are operating as normal as the glove manufacturing industry is one of MITI’s list of essential supply industries. However, the group’s office workers are split into two teams, alternating between work from home and office.

• Top Glove said that there have been some disruptions in the supply of packaging and chemicals as there are many suppliers that have not gained approval to operate during the MCO yet. Furthermore, suppliers that gained approval are only operating at 50% workforce level.

Source: AmInvest Research - 27 Mar 2020