Investment Highlights

• We maintain HOLD on Top Glove with a lower fair value (FV) of RM3.10 (vs. RM3.77/share previously). Top Glove’s FY21 earnings missed expectations due to lower-than-expected average selling price (ASP). We reduce our earnings estimates for FY22 and FY23 after lowering our ASP assumptions. We raise our PE to 18x (from 14x) on the company’s improved ESG outlook after the US lifted its ban on Top Glove products.

• Earnings missed expectations. Top Glove’s FY21 earnings of RM7.87bil made up 92% of our estimate. It also accounted for 91% of the consensus forecast. Overall, the results missed expectations due to the faster-than-expected drop in gloves’ ASP.

• 4QFY21 earnings dropped 70% QoQ to RM608mil. The drop in earnings was due to lower ASP and volume. Higher supply from China and Thailand weighed on ASP. As for volume, the decline was the result of the US ban on its gloves in the respective quarter.

• Dividend of 5.4 sen announced. Payment will be on 15 Oct while the ex-date is 1 Oct.

• Outlook. We expect Top Glove’s sales volume to improve in 1QFY22 as the company is been allowed to export its gloves to the US effective 10 September. Note that the US is the largest gloves consumer in the world, accounting for about 35% of global demand. Having said that, we believe that the current ASP downtrend should continue in 1QFY22 but will stabilize in 2QFY22.

• Earnings estimates reduced. We have reduced our FY22/FY23 earnings estimates by 34%/10% to RM1.86iln/RM1.37bil. The lower earnings estimates are due to a reduction in ASP assumptions. Our key assumptions for blended gloves ASP for FY22/FY23 are US$26.2/US$23.9 (previously: US$30.5/US$26.5).

• FV lowered to RM3.10. We have rolled over our PE target to CY23. Our PE has been raised to 18x (from 14x). Note that Top Glove’s forward PE average is 18x before the pandemic. The increase in its forward PE valuation is also to better reflect its improved ESG outlook after the US ban’s removal.

• Maintain HOLD; ESG score remains at 3 stars. The ASP downtrend should cause earnings to decline QoQ in 1QFY22. On a positive note, Top Glove’s ESG outlook has improved. The company is also in strong net cash position of RM2.05bil or RM0.26 per share.

Source: AmInvest Research - 20 Sept 2021