Top Glove’s 1QFY21 revenue of RM4.76bn (+53% QoQ, +294% YoY) brought core PATMI to RM2.37bn (+72% QoQ, +22-folds YoY) after removing forex gain of RM1.9m. The results came in above ours and consensus full year estimates. The positive deviation was from higher-than-expected revenue contribution. In 1QFY21, profit improved thanks to higher ASPs (+57% QoQ, +197% YoY) driven by robust glove demand to cater to the ongoing Covid-19 pandemic. We raise our FY21-22 earnings by 83%/68% to reflect in better revenue contribution (improving ASPs); also, we introduce FY23 numbers. Post earnings adjustments, our TP increases to RM11.05 (from RM10.38), based on mid-FY22 earnings pegged to a lower PE multiple to 10.6x (-2SD below 5-year mean). Maintain BUY.

Above expectations. 1QFY21 revenue of RM4.76bn (+53% QoQ, +294% YoY) brought core PATMI to RM2.37bn (+72.4% QoQ, +22-folds YoY) after removing forex gain of RM1.9m. The result came in above ours and consensus expectations at 38% and 28% of full year forecast respectively; the positive deviation was due to higher-thanexpected revenue contribution (ASP driven).

Dividend. Declared dividend of 16.5 sen per share going ex on 24 Dec 2020.

QoQ. Revenue improved (+53%) driven by better ASPs (+57%) while sales volume remains flat. This was contributed by Nitrile (vol: -8% (impacted by shortage of NBR and 2 weeks of temporary closure of factories), ASP: +76%), Natural Rubber (vol: +6%, ASP: +48%), Vinyl (vol: +116%, ASP: +61%) and Surgical (vol: -15% (due to some conversion of lines to produce examination gloves), ASP: +34%). EBITDA margin increased to 66.1% (+12 ppts) on better operational efficiency from machine upgrades. Higher raw material prices slightly capped the improvement; NR prices (+13%) and NBR prices (+39%). Overall, core PATMI improved to RM2.37bn (+72.4%) despite higher effective tax rate (22% vs. 4QFY20: 17%).

YoY. Revenue surged (+294%) on the back of stronger ASPs (+197%) and sales volume (+34%). This was thanks to stellar demand for gloves driven by the ongoing Covid-19 pandemic which lifted all glove segments: Nitrile (vol: +18%, ASP: +268%), Natural Rubber (vol: +52%, ASP: +168%), Vinyl (vol: +116%, ASP: +230%) and Surgical (vol: -3% (due to some conversion of lines to produce examination gloves , ASP: +77%). EBITDA margin improved by 50.7 ppts (from 15.4%) amplified by greater operational efficiency from higher utilisation levels (c.97%, vs. 1QFY20: 85%). However, this was slightly mitigated by higher raw material prices; NR prices (+18%, to RM5.14/kg) and NBR prices (+24%, to USD1.31/kg) that was caused by less favourable weather conditions and shortage in supply. All in core PATAMI came to RM2.37bn (+22- folds) despite higher effective tax rate (22% vs. 1QFY20: 11%).

Capacity. In 2021 Top Glove will add c.18bn pieces in capacity bringing its total installed capacity to c. 108bn pieces (+20% YoY). Thus, we feel Top Glove will be able to keep up with the rising global glove demand (FY21: +25%, FY22: +15%, vs, normalised pre-Covid-19 levels of +8-10%). The normalised global glove demand growth is seen to rise post Covid-19, even when vaccine is readily available, by c.+15% thanks to more gloves users (i.e. non-medical users, F&B) due to increasing hygiene standards. Also, gloves would still be required for administrating the vaccines.

Outlook. We expect FY21 to continue to thrive, driven by higher demand and ASPs. Also, additional new capacity is expected in 2QFY21 with product mix shifting more on Nitrile gloves would also contribute to the better showing. Additionally, Klang factories would resume production in 4 stages over 2-3 weeks’ time. Spot orders remain high at c.30% of capacity (vs. pre-Covid: 5%). Current lead time of Nitrile and Latex gloves stood c.510 days and c.340 days respectively ahead of pre-Covid-19 level of 30-40 days. Top Glove plan is on track to being listed on the Stock Exchange of Hong Kong.

ESG update. Top Glove is a member of Dow Jones Sustainability Indices (DJSI) and FTSE4Good ESG indices. It is the only Malaysian company to be included in DJSI this year. To date, Top Glove had donated over 4m pieces of gloves to organisations in Malaysia, 3m pieces of gloves to China and contributed RM300k worth of ventilators and medical suits to MOH. Apart from that, Top Glove is committed to improve its existing workers’ accommodations, with having an allocation of c.RM100m to be poured in for the cause.

Forecast. We increase FY21-22 earnings by +83% and +68% respectively to reflect better revenue contribution supported by further increase in our ASPs assumption with expectation of continuous robust demand in FY21. We introduce FY23 estimates.

Maintain BUY, TP: RM11.05. Apart from the upward earnings adjustments, we decided to roll forward out valuation horizon from FY21 to mid-FY22 to capture some degree of downward earnings normalisation post-vaccine. In addition, our PE yardstick is also adjusted from 13.6x (-1.5SD) to 10.6x (-2SD) to reflect possible sentiment dent from the positive vaccine developments. All in, our TP increases from RM10.38 to RM11.05. Maintain BUY rating and the stock remains our top sector pick.

Source: Hong Leong Investment Bank Research - 10 Dec 2020