• Overview. Top Glove’s (TG) 1QFY21 reported a record profit quarter of RM2.4bn (+102% qoq, +2032% yoy) mainly due to i) increase in sales volume (+0.1% qoq, +34% yoy), ii) higher ASP and iii) better economies of scale. PATMI margin improved to 49.9% (+8.4ppts qoq, 40.7ppts yoy).
• Key highlights. Demand continued to be strong with TG’s long lead time order of NBR: 510 days and NR: 340 days (chart 1). Management expects ASP for 2QFY21 to be +30% qoq (previously target min 5% rise). On its expansion strategy, TG has embarked on a RM10bn capex over the next 5 years and targeted additional production capacity of 39bn pcs p.a. giving a total of 129bn pcs p.a. by end-2022 (table 2).
• Against estimates: Above. 1QFY20 PATMI was above our forecast at 45%. We believe the higher-than-expected earnings’ was due to our conservative assumption on potential ASP hike and margin. We raised our FY21/22F EPS estimate by 60%/57% respectively, as we factor in higher ASP following management’s guidance.
• Higher DPS. A total quarterly DPS of 16.5 sen including special dividend 6% was declared, bringing a payout of 56% (vs FY20: 11.8sen). We estimate total FY21 of 58 sen, translates into dividend yield of 8.5%.
• Outlook. TG near to mid-term sentiment has taken a huge hit from positive vaccine development and TG’s negative latest developments(i.e. charges for non-compliance with Act 446 and disruption to its factories operations). Although ASP is unlikely to sustain at current levels in 2022, we still believe that long term glove demand remains promising as it continue to benefit from a structural change in higher glove usage due to greater hygiene awareness. Demand growth estimates post-COVID-19 of c.12% will outpace the historical growth rate of around 8-10%.
• Maintain BUY call. Despite EPS rise, our TP is lowered to RM8.50 (from RM9.60), implying PER of 23x (+1SD 5 years historical forward PE) pegged to FY22 EPS as we rolled over our valuation year to reflect a normalised long-term earnings growth as it moves past peak Covid-19 period, ie FY21. Although we forecast ASP to decline in FY22, we still believe that long term demand growth remains positive. Maintain BUY.

Source: BIMB Securities Research - 10 Dec 2020