Top Glove reported a net profit of RM5.2bn in 1HFY21, up 2209.4% YoY, mainly due to higher sales volume and stronger ASP. Its performance came in above our but was within consensus forecasts at 57% and 51% respectively. The discrepancy in our forecast was due to higher-than-expected revenue. We adjust our earnings projections for FY21F upwards by 13% as we raise our ASP assumption, but we kept our FY22-23F earnings estimates unchanged. Our TP is subsequently revised to RM7.60, implying a PE multiple of 8x (at its 5-year historical mean) on its CY21F EPS. Top Glove is currently trading at an undemanding valuation of 5.1x PER and given the upside of 46%, we maintain our Trading Buy call. Downside risk to our call includes: (i) sharp decline in ASP, and (ii) higher-than-expected raw material costs.

• New record. Top Glove has reported another new record high in revenue, reaching RM5.4bn (+336% YoY) in 2QFY21. This was achieved on the back of stronger sales volume (+19% YoY) as well as an improvement in ASP (+276% YoY), as glove demand grew significantly as a result of the pandemic. We highlight that raw material prices were also on the rise, with latex prices growing 35% YoY, while nitrile prices were up by 114% YoY. Despite the rising raw material cost pressure, Top Glove’s operating margins continued to expand (+57.3ppts YoY; +4.3ppts QoQ) to 69.4%, signifying that the increase in ASP was more than sufficient to pass on the higher cost to customers. Operating profit rose to a record high of RM3.7bn (+2394% YoY), while net profit was up by 2380% YoY to RM2.9bn.

• Shorter lead time, ASP continues to rise. Lead time for nitrile gloves has fallen significantly to 170 days in 2QFY21, from 510 days in 1QFY21. The lower lead time was due to (i) new capacities coming on stream, (ii) customers no longer placing orders 6 to 12 months ahead of time, as well as (iii) unresolved CBP issue and temporary production stoppage in its Meru plants earlier, resulting in delivery delays and ultimately order cancellation as customers were unable to wait any longer for supplies. However, Top Glove is still expecting to raise ASPs by 3-5% MoM for March to May as demand is still rather stable at this point. We are of the view that ASPs should stay elevated until 1HCY21 at the very least and in the event of ASPs tapering off, it will likely decline gradually over time.

• More dividend for shareholders. Starting 2QFY21 to 4QFY21, Top Glove has committed to a special dividend payout of 20% to reward its shareholders. This on top of the existing 50% committed as per its dividend policy and would bring the total dividend payout to 70%. Top Glove has also declared a second interim dividend of 25.2sen per share. Based on our forecasts, Top Glove should pay out a total DPS of 84.3sen for FY21F, translating to an attractive dividend yield of 16.2%.

Source: PublicInvest Research - 10 Mar 2021