9MFY21 core PATAMI of RM7.2bn (YoY: 12.2x) was below ours but in line with consensus forecasts. The shortfall was due to lower-than-expected sales volumes following the halt in shipments to the US due to the CBP ban. Our FY21/22/23 forecasts are lowered by 9.0%/5.6%/3.3%. Despite Top Glove missing earnings, we maintain our BUY call with a lower TP of RM6.76 as we believe it is only a matter of time before Top Glove’s US CBP ban is lifted.

Below expectations. 3QFY21 core PATAMI of RM2.0bn (QoQ: -29.4%, YoY: +436.2%) brought 9MFY21 core PATAMI to RM7.2bn (YoY: +12.2x). This is below ours but in line with consensus forecasts, accounting for 68.3% and 73.3% respectively. The shortfall was due to lower-than-expected sales volumes, following the halt in shipments to the US due to the CBP ban. Core PATAMI figure was arrived at after adjusting for forex impact amounting to RM20.4m.

Dividend. Declared DPS of 18 sen (12.7 sen interim + 5.3 sen special) goes ex on 23 Jun 2021. 9MFY21: 59.7 sen. 9MFY20 DPS: 3.33 sen after adjusting for bonus issue.

QoQ. Top Glove’s US CBP ban led to the company diverting orders away from the US (North America sales volume: -68%) to other territories (Latin America, Asia ex Japan and Eastern Europe sales volumes grew +66%, +19% and +17% respectively). However, this was insufficient to make up for lost sales, as overall sales volume declined -4% QoQ. Coupled with lower nitrile ASP (-19.2%), revenue and core PATAMI declined -22.4% and -29.4%.

YoY. Despite lower sales volume (-9%), significantly higher ASP (Nitrile: +85.4%) resulted in revenue rising +146.6%. Lower sales volumes were due to Top Glove’s CBP ban as mentioned above. Nitrile glove sales volume decline (-20%) was much more pronounced than natural rubber gloves (-1%) as a higher proportion of disposable glove sales to the US are nitrile. Overall, increased sales more than offset higher raw material prices (natural latex: +45%, nitrile latex: +138%), resulting in core PATAMI rising +436.2%.

YTD. Despite US CBP ban on Top Glove exports to the US in 3QFY21 and Covid- 19 outbreak impact on operations in 2QFY21, sales volumes rose 12% due to higher demand for disposable gloves due to the Covid-19 pandemic. Core PATAMI surged 12.2x from higher sales volumes and ASPs.

Outlook. Top Glove guided that ASPs are expected to see a gradual decline, in line with market prices. We are unsurprised by this as Top Glove’s ASPs had previously reached levels unmatched by its peers. We reckon the likelihood of Top Glove’s CBP ban being lifted soon is favourable, as it has achieved green states in all 11 ILO forced labour indicators, as verified by Impactt (third party ethical trade consultancy).

Forecast. After factoring slightly lower ASPs going forward, we lower our FY21/22/23 forecasts by 9.0%/5.6%/3.3%.

Maintain BUY, TP: RM6.76. Despite Top Glove missing earnings in 3QFY21, we maintain our BUY call with a lower TP of RM6.76 (from RM7.00) after our earnings forecasts adjustment. We think it is only a matter of time before Top Glove’s US CBP ban is lifted, which would result in significant sales volume recovery. We value Top Glove using a PE multiple of 15x tagged to sustainable earnings in a post supernormal earnings environment (FY23) summed with free cash flows generated during the boom period (both discounted back to PV).

Source: Hong Leong Investment Bank Research - 10 Jun 2021