Investment Highlights

• We maintain our HOLD recommendation for Top Glove with a higher fair value of RM8.40 (previously RM8.04). Our valuation is based on a PE of 29x FY22F EPS. Our valuation PE is based on the average 3-year historical forward PE.

• We raise our earnings forecasts by 163% for FY21F and 141% for FY22F. We introduce FY23F earnings forecast of RM1,262.96mil. We increase our blended ASP assumption by 69% to US$60 for FY21F and 32% to US$34 for FY22F.

• Top Glove’s FY20 net profit of RM1,867mil (+400% YoY) was above our full-year earnings forecasts by 45% and 22% above consensus. The variance was due to higherthan-expected net margins which were largely because of better operational efficiency and cheaper raw material prices.

• Top Glove’s 4QFY20 revenue surged more than twofold to RM3,109.1mil. This was on the back of 43% growth in sales volume with blended ASP of US$41 per 1,000 pieces. 4QFY20 YoY ASP leapt by 114% for nitrile gloves, 81% for natural rubber gloves, 30% for surgical gloves and 110% for vinyl gloves.

• 4QFY20 net profit margin expanded 35ppts to 42% in 4QFY20F. This was led by higher ASP from improved demand during the Covid-19 pandemic. It was also propelled by better economies of scale as utilisation rate hovers near 100%.

• Top Glove’s FY20 revenue jumped more than 51% YoY to RM7,236.3mil. This was on the back of 17% growth in sales volume with blended ASP of US$28 per 1,000 pieces. FY20 ASP climbed by 31% YoY for nitrile gloves, 30% YoY for natural rubber gloves, 12% YoY for surgical gloves and 50% YoY for vinyl gloves. FY20 net profit margin grew 18ppts to 26% in FY20F.

• FY20 raw material prices were mixed YoY where latex price rose 2.3% to RM4.43/kg and nitrile prices dropped 13.3% to US$0.98/kg.

• Top Glove’s nitrile glove ASP is now around US$70 per 1,000 pieces. The group expects nitrile glove ASP to grow by 30% MoM in Oct 2020 and 15% MoM in Nov 2020. The increase in ASP was also partly due to higher nitrile latex prices, which are expected to rise about 10–20% monthly.

• On the other hand, latex glove ASP is around US$45 per 1,000 pieces in September 2020. The group is expecting latex glove ASP to grow by 5% MoM in Oct 2020 and Nov 2020. Latex raw material price is expected to remain stable moving forward.

• Top Glove has allocated 30% of its capacity for spot orders. The spot orders for nitrile glove have been fully sold for the next 3 months. On the other hand, the spot orders for natural rubber powder-free gloves are also increasing due to the long lead time of nitrile gloves.

• Top Glove is expecting global gloves demand to grow 20% in 2020E and 25% in 2021F. Moreover, the group expects that it will take new entrants up to 2 years to start production of gloves and that the small scale will cause it to be less competitive with low access to raw material. We estimate that the big glove producers (Top Glove, Kossan, Hartalega, Supermax and Sri Trang) will increase capacity by 21% in 2020E, 23% in 2021F and 28% in 2022F (as shown in Exhibit 3). We believe that the higher supply of gloves from the expanded capacity coupled with the recent strides in vaccines formation will exert a downward pressure on the ASP of gloves as the urgency of glove orders would be gradually taper.

• The group is engaging with the US Customs and Border Protection (CBP) in order to resolve the Withhold Release Order. The total remediation payment, estimated at RM53mil, is subject to finalization with the US CBP. So far, Top Glove has made 2 remediation payments totaling RM8.8mil. The US CBP has requested Top Glove to conduct an independent audit which entailed virtual interviews of around 1,100 workers. This independent audit report has been submitted to the US CBP. The group estimates that the issues should be resolved by end-2020.

• We expect Top Glove’s net profit to peak in FY21F as demand soars from Covid-19 pandemic with increased capacity expansions. However, net profit margin may be weighed down by higher raw material prices resulting from the supply constraints of nitrile latex materials. We forecast Top Glove’s net earnings to jump 246% tin FY21F to RM6,544.8mil supported by a net margin of 30%.

Source: AmInvest Research - 18 Sept 2020