Top Glove’s 4QFY21 net profit was lower by 70.1% QoQ to RM607.9m, as a result of a 49.2% drop in revenue and 28.1ppt decline in EBIT margin. The weaker performance was attributed to a steep decline in average selling prices (ASP) and sales volume as well as enforcement of movement restrictions locally. For FY21, the Group registered a 349.1% YoY growth in net profit to RM7.9bn however, thanks to higher ASPs driven by the ongoing pandemic. The overall results are below both our and consensus estimates at 87.5% and 91.1% respectively. We lower our earnings projections for FY22-23 by ~36.5% on average, considering i) lower ASP, ii) lower utilization rate, and iii) slower capacity addition going forward. Subsequently, our TP is lowered to RM2.83 from RM4.40 previously, implying a PE multiple of 17x (at its pre-Covid historical 5-year mean) pegged to its CY23F EPS of 16.3sen. Maintain Neutral.

• 4QFY21 results highlight. Revenue was down by 49.2% QoQ to RM2.1bn, in tandem with the decline in sales volume (-23% QoQ) and ASP. Performance was also affected by the movement restrictions as facilities were only permitted to operate at 60% manpower capacity, while the Selangor factory also saw a 10-day closure. EBIT margin dropped 28.1ppts QoQ to 34.5%. Operating profits declined 71.9% QoQ to RM730.7m, while net profit was 70.1% lower QoQ to RM607.9m. Utilization rate for 4QFY21 stood at c.70%.

• Sales to US to fully recover by year-end. Sales volume for the full year FY21 softened marginally by 2% YoY, on the back of lower sales to the US. Nevertheless, recent breakthroughs with the US Customs and Border Protection will see Top Glove resuming its exports to the US. It is understood that sales to the US prior to the ban made up ~15% of total sales. It dropped to between 5% - 7% as customers were still allowed to import from its other manufacturing plants outside Malaysia. Management indicates that shipment will resume as early as end September and will fully recover by the end of this year.

• Normalising trend. ASP for gloves will continue to decline and is likely to normalize in 2022 as more supplies will be available in the market in the coming months with the commercialisation of new glove plants. That said, the impact on Top Glove is expected to be cushioned by the sales to the US. Note that the ASP in the US is about 10% higher than non-US market. We gather that ASP for nitrile glove currently is about USD40 while latex glove is around USD35, thus remaining within the 5-10% MoM range of decline. As for capacity expansion, we observe that expansion plans have been scaled back given market conditions. As demand normalizes, capacity planned is now reduced to 201bn pcs by end 2025 from 207bn pcs previously with capacity to grow at 11%/23%/18%/24% YoY till 2025.

• Dividend. Top Glove declared a final dividend of 3.8sen per share and a special dividend of 1.6sen per share, making up total dividend declared this financial year to 65.1sen, translating to a 66.5% payout.

Source: PublicInvest Research - 20 Sept 2021