• We maintain our HOLD recommendation for Top Glove with a lower fair value of RM7.88 (previously RM8.40). Our valuation is based on the rolled-over CY22 EPS over its 5- year average PER of 28x. We make no changes to our FY21– FY23 net profit forecasts.

• AmInvestment Bank recently hosted a webinar with Top Glove and institutional investors. Management updated us on the group’s latest development and also the its plan postCovid-19. Here are the key highlights:

1) Demand will remain robust post-Covid19. Top Glove expects the demand for gloves to remain on a positive trend post-Covid19 (Exhibit 1). The main reason is the pandemic has raised much awareness on personal hygiene, resulting in a higher usage of gloves. In developing countries, the usage of gloves is increasing with a wider adoption of gloves usage from nonmedical industries such as F&B, services, retail etc.

2) There may not be an oversupply of gloves post-Covid-19. Management noted that to increase the supply of gloves, there are some key issues that need to be addressed such as: (i) the availability of contractors to build production lines; (ii) shortage of foreign workers; and (iii) constraint of nitrile raw material.

3) 30% of capacity for spot orders. 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. Meanwhile, the spot orders for natural rubber powder-free gloves are also increasing due to the long lead time of nitrile gloves.

4) Capacity expansion. Presently, Top Glove has a total production capacity of 90bil pieces per annum. The company has allocated a capex of RM10bil over the next 5 years for capacity expansion (Exhibit 2) to double its current capacity by the end of 2025. This will be done in stages whereby 14bil pieces will be added for FY21 and 16bil for FY22.

• We hold the view that demand for gloves will remain stable post-Covid-19 due to the abovementioned reasons. However, we expect ASP to decline as there is no longer a rush for gloves compared to what happened at the beginning of the pandemic. We reckon that ASP will stabilise at a higher level than the pre-pandemic level due to the broader usage of gloves.

• We maintain our view that Top Glove’s net profit will peak in FY21F as demand soars from the Covid-19 pandemic with increased capacity expansions. We make no changes to our FY21–23 net profit forecasts at RM6.5bil, RM2.3bil and RM2.2bil respectively. Our ASP assumptions are US$60/1,000 pcs for FY21, US$35/1,000 pcs for FY22 and US$28/1,000 pcs for FY23 with an average utilisation rate of more than 80%. We roll over our valuations to CY22 and arrive at a lower fair value of RM7.88 per share. We believe Top Glove’s fundamentals remain solid for the next few years. Nevertheless, at its current share price, it offers limited upside, hence we maintain our HOLD recommendation, and advise investors to accumulate at lower levels.

Source: AmInvest Research - 12 Nov 2020