• Overview. Top Glove’s (TG) 4QFY20 reported a stellar quarter earnings performance of RM1.29bn (+271% qoq, +1642% yoy) mainly due to i) increase sales volume (+5% qoq, +42.5% yoy), ii) higher ASP and iii) better economies of scale. PATMI margin improved to 41.6% (+20.9ppts qoq, 35.3ppts yoy).

• Key highlights. Production utilization was >95% with significant increase in sales lead time until end-2021 (refer chart 1). Top Glove has the greatest spare capacity compared to its peers with expansion plans to increase capacity to 104.5bn pcs p.a. (+c.22%) by end-2021. (table 2).

• Against estimates: Above. FY20 PATMI of RM1867m (+412% yoy) was above our and consensus forecast at 134% and 123% respectively. The variance was due to the higher-than-expected ASP and margin.

• Higher DPS. A final single tier DPS of 8.5 sen was declared, bringing FY20 total DPS to 11.8sen (FY19: 2.5sen). This translates into dividend yield of 1.5% and payout of 51%.

• Outlook. Strong demand visibility from still unabated and new waves of Covid-19 infections as well as further ASP hikes (expect to peak earliest at end2020) solidify our view for explosive earnings expansion over at least the next 3 quarters. We expect long-term demand post-Covid-19 to remain higher >c.12% p.a on greater hygiene awareness, as well as structural change in gloves usage globally in non-medical sectors.

• Earnings revision. We raised our FY21-22F EPS higher by 48-77% respectively, as we factor in higher ASP and higher margin from better economies of scale.

• Maintain BUY call. In tandem with EPS hike, our TP is raised to RM10.80 and maintain BUY recommendation. Valuation is based on PER of 16x (in line with 5 years historical forward mean) pegged on astronomical growth in FY21 EPS (chart 3). We continue to like Top Glove due to i) greater excess capacity compared to its peers, ii) higher ASP increase among OEM players as they are a major supplier with a diversified customer base, and iii) visionary management.

Source: BIMB Securities Research - 18 Sept 2020