Investment Highlights

• We raise our recommendation on Top Glove Corporation (Top Glove) to BUY from HOLD with a higher fair value of RM12.23/share (RM6.28/share previously).

• Our valuation is based on 33x FY21F EPS. Our multiple is at a premium of the stock’s average forward PE of 25x (preCovid-19).

• We increase our earnings forecasts by 98% for FY20F, 95% for FY21F and by 20% for FY22F. This is underpinned by increased demand as the Covid-19 pandemic persists, assuming it lasts another 12 months. We estimate that Top Glove’s net margins to be around 12.7% in FY20F, 11.5% in FY21F and 8.5% in FY22F.

• We believe Top Glove is one of the largest beneficiaries of the Covid-19 pandemic due to its highly diversified customer base, which allows the company more freedom for selling price adjustments.

• Top Glove’s expansion plans, as shown in Exhibit 1, remain intact. Its production capacity is expected to grow by around 20% YoY to 76bil pieces per annum in FY20F, 10% to 86bil pieces in FY21F and 7% to 96bil pieces in FY22F.

• We are increasing our sales volume assumption by 6% for FY20F and 5% for FY21F as plant utilisation is expected to be maxed out at 95–100% levels in FY20F before tapering in FY21F where we assume 85% utilisation rate.

• We also raise our ASP assumption by 45% to US$29 in FY20F, 40% to US$28 in FY21F and 18% to US$24 in FY22F.

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

• Previously during the H1N1 pandemic, Top Glove’s revenue and net profit expanded 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).

• 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 (+7.2SDs) in April 2010.

• We 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.

Top Glove Corp 20 May 202

Source: AmInvest Research - 20 May 2020