We expect to see a further increase in demand driven by Covid-19 (c. 30% vs. normalized 8-10% growth YoY) that would result to the shortage of gloves. Top Glove has received a surge in demand, with ASP increases along with spot orders (10% of volume, priced 2-3x higher). We take the opportunity to increase our FY20-22 earnings by 22%/65%/50% to reflect expectation of higher ASPs (c. +6% YoY) and higher demand with improved utilization (almost full capacity till 2021). Post earnings adjustments, our TP increases to RM19.80 (from RM13.50). Our TP is based on mid FY21 earnings pegged to PE multiple of 38x (2SD above 5 year mean). We maintain BUY and retain as our sector top pick.

Growth in coming quarters. Heavily driven by Covid-19, we foresee strong demand in the coming quarters (c. 30% vs. normalized 8-10% growth YoY). Furthermore, with no vaccine found and health experts are of opinion that it would take 12-18 months for a vaccine to be developed, we believe demand for gloves would remain robust. Being the largest glove manufacturer in the world, commanding 26% of global market share, we feel Top Glove remains in pole position to benefit from this as it has seen a surge in orders in tandem with the current strong global glove demand. Its usual pre-Covid- 19 lead time of 1-1.5 months has risen to c.11 months in mid-May and has currently extended to beyond 12 months. Moreover, with the recent riots in US, risk of Covid-19 clusters arising from there cannot be discounted. Note that glove consumption from US is the highest at 150 pieces per capita (vs. Germany: 141 pcs/capita, Italy: 123 pcs/capita, Europe: 100 pcs/capita); Top Glove’s distribution to North America is the highest (1HFY20 sales volume to US stood at 26%).

ASP. We understand ASP has exhibited upward pressure (more than 15% since Feb), and we expect the upward trend to sustain until year end. Utilisation rate pre Covid-19 stood at 85%, but has now increased to full capacity (c. 97%); we expect this to remain at this level until 2021. Apart from that, Top Glove has also been receiving spot orders (i.e. urgent orders that are can be placed at higher price). These spot orders are 2-3x more than normal ASPs depending on urgency. Spot orders makes up roughly 10% of Top Glove’s sales volume.

Expansion. Despite the MCO/CMCO, Top Glove’s expansion plan is on track. By end of 2020 Top Glove will have a total capacity of 86.4bn pieces (c.+22%YoY). Additionally, Top Glove has explored into diversifying their product range to face masks (capacity of 110m pieces per annum). To date, it is on track, with targeted commencement in June 2020.

Forecast. We take this opportunity to upgrade our FY20-22 earnings by 22%/65%/50% to reflect in better profitability, drive by further increase our assumption on ASPs (c. +6% YoY) and utilization (to run at full capacity at least until 2021). We hope to see more visibility with the release of 3QFY20 result that is being set on 11 June.

Maintain BUY, TP RM19.80. We maintain BUY with higher TP of RM19.80 (from RM13.50). Post earnings adjustments, our TP increases to RM19.80 (from RM13.50). Our TP is based on mid FY21 pegged against PE multiple of 38x (2SD above 5 year mean). We maintain BUY and retain as our top pick for the sector.

Source: Hong Leong Investment Bank Research - 10 Jun 2020