Top Glove’s 3QFY20 core PATMI of RM365.0m (+195% QoQ, +>350% YoY) brought 9MFY20 sum to RM596.3m (+99% YoY) after stripping forex loss of RM21.3m. The results came in ahead of our expectations, as we anticipate an even stronger 4Q. 3QFY20 earnings improved (+ 195% QoQ) mainly due to Covid-19 pandemic boosted improvement in all glove segments; increased sales volume (+25% QoQ) and ASPs (+5% QoQ). We raise FY20-22 forecasts by 12%/58%/45% to reflect in higher ASPs (+6% YoY). Our TP increases to RM23.91 (from RM19.80), based on mid-FY21 earnings pegged to PE multiple 33x (+1SD above 5 year mean). Maintain BUY and retain as our top pick for the sector.

Above expectations. 3QFY20 core PATMI of RM365m (+195% QoQ, +>350% YoY) brought 9MFY20 core PATMI to RM596.3m (+99% YoY) after stripping forex loss of RM21.3m. The results came in at 59% and 65% of ours and consensus expectations; we deem it to be above expectations in anticipation of an even stronger 4Q.

Dividend. Declared first interim dividend of 10 sen per share going ex on the 25 Jun 2020 (3QFY19: 3.5 sen per share).

QoQ. Revenue of RM1.7bn was the highest attained, with an increase of +37.3% thanks to stronger sales volume (+25%) and improved ASPs (+5%). The improvement was mainly due to Covid-19 which lifted all glove segments: Nitrile gloves (volume: +27%, ASP: +4%), Natural Rubber gloves (volume: +25%, ASP: +8%), Surgical glove (volume: +14%, ASP: +5%) and Vinyl glove (volume: +17%, ASP: +12%). EBITDA margin improved by 12.4 ppts to 28.2% due to the increased production utilisation at c.97% (2QFY20: 86%) and also lower NBR prices (-10%) while NR prices remained flattish (-1%). The strengthening of USD (+5%) also aided the boost. Subsequently, core PATMI improved to RM365m (+195%).

YoY. Revenue improved (+41.8%) due to the increase in sales volume (+24%) and improved ASPs (+9%). This was contributed by: Nitrile gloves (volume: +47%, ASP: +5%), Natural Rubber gloves (volume: +8%, ASP: +10%), Surgical glove (volume: +21%, ASP: +6%) This was slightly offset by the decrease of sales volume for Vinyl glove segment (-15%), but saw improvement of ASPs (+31%). EBITDA margin increased by 16.5 ppts (from 11.7%) on the back of greater efficiency from higher utilization (c.97% vs. 3QFY19: 80%) as well as lower raw materials prices; lower NBR prices (-14%) and lower NR prices (-4%). The strengthening of USD (+5%) also helped the boost. All in, core PATMI rose (+>350%) to RM365m.

YTD. Revenue increased to RM4.1bn (+14.3%) attributed to higher volumes (+8.6%) and ASPs (+3%). EBITDA grew by +65.4%; with margin increased to 20.8% (from 14.3%), on the back of greater operational efficiencies. Core PATMI improved by +99% to RM596.3m, due to the abovementioned factors (stronger sales volume and ASPs as well as lower raw material prices and tax; 15% vs 9MFY19: 16%).

Outlook. We expect stronger a 4QFY20 and FY21 driven by improved demand, stronger ASPs and more spot orders (we understand in 3QFY20 spot orders were minimal as it was only the beginning and to date, it makes up about c.20% of capacity). Lead time pre-Covid-19 of 30-40 days has significantly soared to the current average of 292 days. Fuelled with running at full capacity and currently producing 78.7bn gloves p.a., with expected production of 100.4bn pieces p.a. by 2021; we feel Top Glove is at a supportable situation to cater to the increasing demand

Source: Hong Leong Investment Bank Research - 12 Jun 2020