• Top Glove's 3QFY21 earnings were below expectations off the back of US CBP weighing on volume sales and resulting in ASPs normalising. The eventual lifting of the WRO by the US CBP should uplift sentiment and boost volume sales. This is however against the backdrop of rationalised earnings and lower severe COVID-19 cases in key markets.
• Hence, we downgrade our recommendation for Top Glove to HOLD from BUY with a lower target price of RM5.15 as we trim our earnings.
• Suggest entry price: RM4.00.

Top Glove's 3QFY21 Earnings Below Expectations on the Back of Rationalising ASPs

• Top Glove’s 3QFY21 (Mar 2021 to May 2021) core net profit of RM2,036m (-29% q-o-q, +485% y-o-y) brought 9MFY21 earnings to RM7,466m (+1,198% y-o-y). This is below our and consensus expectations, accounting for 68% and 76% of full-year estimates respectively.
• Heading into the subsequent quarter, we expect volume output to increase, but this will weighed by a faster-than-expected downward reversion of its ASPs.
• An interim dividend of RM0.18 was declared, bringing cumulative 9MFY21 dividend to RM0.597. The interim dividend represented a dividend payout of 70%, in line with Top Glove’s intention of a 20% special dividend to supplement its usual 50% payout.

Revenue Curtailed as ASPs Fall From Peak But Volume Sales Were Further Diminished by US CBP

• Top Glove's revenue was tempered by 22% q-o-q (+147% y-o-y) to RM4,163m in 3QFY21. This was attributed to:
  1. blended ASP declining by 16% q-o-q,
  2. US$/RM rate gaining 1.8% q-o-q, and
  3. volume contracting 4% q-o-q due to a reduction in sales to the US, following its compliance requirements of the US Customs and Border Protection (CBP).
• Recall that volume sales had already contracted in 2QFY21, which was already been derailed by an outbreak of COVID-19 that temporarily affected production.
• Heading into 4QFY21, nitrile ASPs could be lower by 20-30% q-o-q or -5-10% lower on a m-o-m basis. We gather that nitrile ASPs are currently trending between US$75-70/’000 for the months of Jun-Jul 21. This is slightly ahead of our earlier expectations of ASPs normalising by 3-5% m-o-m. We attribute this to:
  1. the withhold release order (WRO) by the US CBP, which accelerated the deterioration in ASPs, and
  2. the successful vaccination rollout in developed markets.

Margins to ease going forward, alongside normalising ASPs.

• EBITDA margin softened to 63.8%, or -6.7ppt, against lower ASPs and raw material cost, with higher latex and nitrile costs which grew at 8% and 0.4% q-o-q respectively. Positively, raw material cost is expected to trend downwards. Nitrile cost is being eased by incoming supply while the wintering period is over, marking an increase in latex supply.
• That said, the decline in ASPs is expected to outpace the decline in raw material cost, which should gradually normalise margins in the quarters ahead.

Stock Impact

Sentiment overhang remains with unresolved WRO.

• Top Glove’s WRO by the US CBP has been under review by Top Glove to see volume growth ahead but at an expense of its ASPs given that key geographic regions that typically command premium ASPs are curtailing demand.

Earnings Revision / Risk

• We cut our FY21-23 earnings forecast for Top Glove by 20/10/10% off the back of more conservative ASP assumptions.
• Key downside risks include:
  1. swift containment of COVID-19 outbreak, and
  2. disruption to its production or supply chain caused by the COVID-19 outbreak.
• Every -1% deviation from our RM4.10/US$ assumption translates to 1.2% and 1.8% declines to our FY21-22 EPS respectively.

Valuation / Recommendation

Downgrade Top Glove to HOLD with a lower target price of RM5.15 (from RM6.30).

• We expect target price for Top Glove is SOTP-based, derived from the present value of the:
  1. expected dividends over FY21-23, and
  2. FY23 earnings pegged to Top Glove’s pre-COVID-19 5-year forward P/E mean of 23x.
• The target price implies a P/E of 25.8x FY23F earnings. Our target price for Top Glove could be adjusted by up to -6.1%, or RM4.84, should its share issuance for its dual primary listing be fully taken up.

Source: UOB Kay Hian Research - 10 Jun 2021