• Overview. Top Glove’s (TG) 3QFY20 reported its highest ever quarter performance, a triple-digit earnings gain to RM347.9m (+201% qoq, +366% yoy) mainly due to higher sales volume (+25% qoq, +24% yoy) and ASP (+5% qoq, +9% yoy). Raw material prices fell during the quarter (NBR: -10% qoq, -14% yoy; NR: -1% qoq, -4% yoy). Together with overall lower operating expenses, TG’s PATMI margin improved to 20.6% (+11.2ppts qoq, 14.3ppts yoy).
   
• Key highlights. Utilization rate >95% with significantly longer order lead time up to 1H2021 (Nitrile glove: 14 months, Natural Rubber: 13 months, Surgical: 5 months, Vinyl: 6 months). Top Glove has the largest extra capacity compared to its peers with plans to increase capacity to 86.4bn pcs p.a. (+c.22% yoy) by end of 2020. (refer table 2). An amount of RM3bn in capex allocation for expansion in CY2020 to CY2026 includes the construction of Top Glove Innovation Complex (TGIC), a smart and digitalised manufacturing plant (to be completed by 2QCY2022).

• Against estimates: Inline. 9MFY20 PATMI of RM575m, making up 61.7% of our full year forecast is considered in-line as we are expecting higher 4QFY20 performance.

• Higher DPS. An interim DPS of 10 sen was declared (vs 3QFY19: 3.5sen). We expect full year DPS of 18sen, translating into dividend yield of 1.1% and payout of 50%.

• Outlook: Long term strong demand to persist. The business outlook for Top Glove is secured for the next 12 months with order book filled. As for longer term, uncertainties with regards to virus resurgence as well as when can the pandemic be contained would ensure continued strong demand for gloves. Greater hygiene and healthcare awareness brought about by Covid-19 have created a new normal for higher usage of glove in the future with demand to show a growth rate of up to 12% post Covid from pre-Covid c.8-10%. There is a potentially higher-than expected earnings growth on increase demand and stronger ASP, in our view. We gathered from management that from June onwards, ASP could rise c.15% mom up till Aug, including higher ASP of c. 3x for Ad hoc sales (allocated up to 20% of overall capacity).

• Our call. We maintain our earnings forecast with TP RM20.50 based on unchanged PER of 38x pegged on FY21 EPS. We like Top Glove due to i) largest extra capacity compared to its peers, ii) higher ASP increase among OEM players as the company is a major supplier with a diversified customer base, and iii) strong management.

Source: BIMB Securities Research - 11 Jun 2020