We met up with management and here are some key takeaways. With the Coronavirus outbreak, Top Glove has received increase in demand for rubber gloves. The recent OPR cut gave an opportunity for Top Glove to issue a perpetual Sukuk of RM3.0bn. Factory 5A, in Ipoh is on track to commence production by end of thi s month. We take the opportunity to update FY22’s capacity that increases FY22 earnings by 7%. We maintain BUY with unchanged TP of RM6.76, based on FY20 earnings pegged to PE multiple 35x.

We met up with management recently to get some operational updates. Here are some of the key take aways:

Coronavirus. World Health Organization (WHO) has declared the Coronavirus outbreak which started in Wuhan, China in December 2019, a global emergency. Typically, in the event of a disease outbreak, a surge in demand is expected. Previously during the SARS and H1N1 outbreak, the global demand for gloves increased to approximately 15%; for Top Glove, demand of gloves were increased by c.20% during H1N1 outbreak. Recently, this new coronavirus has triggered an increasing demand of gloves from China by 4x; however Top Glove’s export to China is miniscule (1QFY20: c.4% of sales volume). Closer to home, Singapore has increased orders by 20x during period of CNY to date (1QFY20: 0.6% of sales volume). Fortunately, Top Glove has not faced any logistical issue (i.e. delays) as we understand healthcare related products gets delivery priority. We also expect stronger demand of latex gloves in the coming 2 months because of this outbreak. However, we choose to remain prudent by keeping pat our demand assumptions, as we can’t ascertain the actual quantum at this juncture and how long it will last.

China factory. Top Glove has 1 manufacturing factory in China, producing solely vinyl gloves. Vinyl gloves are produced with the intention to export it to US. Even though workers are asked to take prolonged leave, we do not feel it will disrupt earnings as vinyl only makes up c. 2% of revenue (1QFY20).

Sukuk. With the recent OPR cut (22 January 2020), Top Glove took the opportunity to issue perpetual sukuk of RM3.0bn in nominal value. The sukuk, which is guided under the Shariah principle of Wakalah Bi-Al has been assigned an AA-IS(cg) rating by MARC. The proceeds raised are intended to be utilised to refinance its existing debt obligations and working capital purposes. Net gearing as at 1QFY20 stood at 86%; assuming an issuance of perpetual sukuk of RM1bn, net gearing is expected to fall to c.34% (perpetual sukuk is classified equity instead of debt). The sukuk is planned to be issued by end month.

Expansion. Newest factory, F5A located in Ipoh, Perak is on track to commence production by end of this month, bringing the number of factories to 34 by 2QFY20. By end of 2020 Top Glove will add c.11.8bn pieces in capacity bringing its total installed capacity to an estimated 81.9bn pieces (+16.8% YoY) with 781 lines in 2020 with the bulk of the capacity to come in the second quarter of the year.

Forecast. We take this opportunity to adjust/update FY22’s capacity that increases FY22 earnings by 7%.

Maintain BUY, TP RM6.76. We maintain BUY with unchanged TP of RM6.76. To recap we changed our valuations on all glove companies under our coverage to +1.5SD in our Strategy report (3rd Feb); Top Glove’s PE multiple was raised to 35x (from 26x), that increased our TP from RM5.02 to RM6.76. We like Top Glove for its diverse product mix and its prime position to chip away market share.

Source: Hong Leong Investment Bank Research - 7 Feb 2020