Top Glove’s 9MFY21 net profit registered a 1163% YoY growth to RM7.26bn, on the back of stronger sales volume (+12% YoY), supported by the Covid-19 pandemic. The results came in within both our and consensus estimates at 70% and 74% of full-year numbers respectively. Despite the YTD YoY growth, we highlight that Top Glove has registered its first QoQ decline in ASP since the Covid-19 outbreak in early-CY20. Management has guided for ASP to continue falling by 5-10% on a MoM basis in 4QFY21. We lower our earnings projections for FY21-23F by ~13%, to factor in the lower ASP. We also rollover our valuation to CY22F and our TP is subsequently lowered to RM4.45, (at - 1SD of its pre-Covid historical 5-year mean) based on its CY22F EPS of 40.4sen per share. With that, we downgrade our call on Top Glove from Trading Buy to Neutral. Top Glove has also declared a third interim dividend of 12.7sen per share and a special dividend of 5.3sen per share.

• Lower ASP. Top Glove reported its first QoQ decline in revenue since the start of the pandemic as the company had revised its ASP downwards in order to narrow the pricing gap with its peers. Revenue was down by 22% QoQ to RM4.16bn, in tandem with the 16% QoQ decline in ASP. The lower ASP was also partially due to lower sales to US, as glove prices in the US are higher than non-US market. Sales volume also fell by 4% on a QoQ basis, on the back of lower sales to US, after the halt in shipments as per the US Customs and Border Protection’s (CBP) requests. The decline in ASP, coupled with the rising natural latex prices (+8% QoQ) due to wintering season, has led to margin compression, whereby its EBIT margins were 6.8ppts lower QoQ, to 62.6%. Operating profits declined 30% QoQ to RM2.60bn, while net profit was 29% QoQ lower at RM2.04bn.

• Even shorter lead time. Lead time for gloves have continued to decline, to 90-120 days currently, as compared to 170 days in 2QFY21. We highlight that, lead time for vinyl gloves have shortened to less than 30 days during the quarter, due to ongoing competition. Note that Top Glove is also no longer receiving spot orders, as there are available capacities ready to be taken up by buyers currently. Utilization rate for 3QFY21 stood at c.70%.

• Start of the ASP downtrend. Management has guided that the ASP for gloves will continue to decline, by 5-10% on a MoM basis. Although lower ASPs are expected for the coming months, however, we reckon that the ASP decline will be gradual and it should remain elevated as compared to pre-Covid prices.

Source: PublicInvest Research - 10 Jun 2021