Overview. Top Glove’s (TG) FY21 saw an exceptionally higher net profit of RM7.9bn (+349% yoy) on the back of overall higher ASP (+146% yoy) due to Covid-19. However, 4QFY21 net profit dropped RM608m (-70.1% qoq, -48.4% yoy) mainly due to lower sales volume, lower ASP and higher average cost caused by lower output. Hence, profit margin dropped to 28.7% (-20.2 ppts qoq, -9.1 ppts yoy).

Key highlights. 4QFY21 volume fell by 20% qoq due to i) full impact of US sales halt, ii) EMCO & MCO production disruption, and iii) slower customer buying pattern. TG’s blended ASP have fallen by c.32% qoq due to adjustment which is inline with market pricing trend and shortfall in higher US glove prices due to sales halt. Nitrile order lead time have shorten to 30-40 days (vs previous quarter 90-120 days). In tandem with demand-supply dynamics, TG’s capacity expansion plans has been reduced to 162bn pcs (vs 205bn pcs previously) by end-2024. (table 2)

Against estimates: Below. FY21 net profit of RM7.9bn was below our and consensus forecast at 95% and 91% respectively. The deviation was mainly due to faster than expected fall in ASP and lower sales volume. 

Higher DPS. Final (3.8 sen) and special (1.6 sen) DPS was declared in 4QFY21, bringing total FY21 to 65.1 sen (vs FY20: 11.8 sen) and DY 21.3%.

Outlook. Despite upliftment of the CBP ban and long term global glove demand remaining intact, TG is facing multiple headwinds such as near-term sharp fall in market ASP, higher competition and social compliance cost. The fall in TG’s ASP is expected to continue in the upcoming months (c.8-10%) before normalizing in 1Q2022. This is mainly due to the increasing global supply and softer demand on higher vaccine rolled out.

Earnings revision. We revised down our FY22F/FY23F earnings by 39%/21%, taking into account a lower ASP, slower capacity growth and higher operation cost.

Our call. In tandem with earnings revision, we have derived a lower TP of RM3.10 (from RM3.90) based on unchanged PER 16x pegged on CY23F EPS of 19.4 sen. Maintain HOLD.

Conference call key highlights

FY21 is a landmark year in TG’s history with revenue of RM16.4bn (yoy: +127%) and net profit of RM7.9bn (yoy: +349%). The good performance was mainly due to higher ASP caused by Covid-19 pandemic. Balance sheet is solid with net cash of RM2.05bn as at 4QFY21.

4QFY21 net profit of RM608m dropped by -70.1 qoq and -48.4% yoy. The performance was expected to be better if not for the negative effects of:-

i) Normalizing demand as a result of global mass vaccine rollout which impacted volume and ASP.

ii) Full impact of import restriction on gloves from TG Malaysia into the US market under the Withhold Release Order (WTO) imposed by the US Customs and Border Protection (CBP).

iii) Work stoppage under EMCO in Selangor (10 days) and subsequent MCO requirements where facilities were only allowed to operate at 60% workforce.

iv) Higher average cost caused by lower output due to production disruption. v) Decline in raw material price not rapid enough to offset slowdown in ASP.

Upliftment of the WRO by US CBP on 10 September 2021 paves the way for TG to resume exports to the US market. Shipments are expected to begin late September or early October. Management indicated that based on their long relationship with their US clients, export to the US is expected to be fully normalized by December 2021.

Despite the lifting of CBP ban, TG volume growth pressure is expected in near term due to normalizing demand as higher vaccines are being rolled out, high previous restocking in 2020 and clients 'wait and see' attitude for ASP to fall further before ordering. Additionally, the downtrend in ASP is expected to continue in-line with the market ASP which is likely to normalize in 1Q2022, according to TG. We gather that its September ASP for nitrile glove is around US$40-45 and latex glove ASP is around US$33-40 per 1k pcs gloves. This is lower than expected, hence we cut our blended ASP forecast which now stand at US$32/US$29 per 1k pcs for FY22/FY23f.

Taking note of increasing competition and normalizing demand, TG informed that it has slowed down its expansion plans to correspond with current conditions. Currently, TG’s capacity is about 100bn pcs p.a and its capacity expansion plans has been reduced to 162bn pcs by end-2024 (vs 205bn pcs previously). Additionally, by end-2025 TG will have a total capacity of 201bn pcs p.a.

TG is to continue with production of diverse gloves range in it's product mix as these have successfully demonstrated to mitigate business risk. With Covid 19 cases tapering off around the globe, renewed focus will be on surgical gloves as these are gaining demand on the back of more elective surgeries.

CAPEX for 2022 is budgeted around 1bn to be spend on i) new capacity & existing factory upgrade, ii) hostels, iii) NBR & Gamma sterilization plant and iv) ancillary (e.g. warehouses, IT, water, printing R&D, etc).

As to date, over 90% of TG Malaysia employees have completed 2 doses of vaccine and for TG group (globally), 87% or equivalent of 19,154 individuals have been fully inoculated.

The US CBP WRO episode is considered a good learning experience for TG. Despite the negatives, TG stand to gain going forward as it has rectified and met all the International Labour Organisation (ILO) requirements on forced labour issues. TG now placed importance and has integrate ESG improvements in it's organizational fabric. This development will place it in good stead with relevant regulators worldwide as well as customers and investors.

Source: BIMB Securities Research - 20 Sept 2021