Top Glove (TOPG) reported a decent set of numbers; 1HFY20 corePATAMI of RM227.1m (+5.2% yoy) is ahead of both our and consensus estimates, despite delivering only 51% and 47% of respective forecasts, as we are expecting a stronger 2HFY20. Management plans to increase its current utilisation to 100%, due to the recent surge in demand for rubber gloves. The delivery lead time has now lengthened to 4 months, which is significantly longer than the 15-30 days in early January. Reiterate BUY with a higher TP of RM7.50.

New Capacity to Meet Stronger Demand

Although overall sales volume for 1HFY20 only grew by a marginal 0.6% yoy, we are expecting a significantly stronger performance in 2HFY20, supported by stronger demand due to Covid-19. We believe that Top Glove is a likely beneficiary as the recently completed plant F2B and F5A would add an additional 5% to its current capacity. TOPG will also be ramping up its current utilisation rate from 90% to 100%, as the current delivery lead time has increased from 15-30 days in early January to 4 months. We are now forecasting sales volume to grow by 13% (from 8%) for FY20E.

Limited Impact From the Restrictive Movement Order for Now

As the glove manufacturers are being labelled as essential industries, there are no restrictions on their production activities. However, there is risk that its new plant F40 might not be able to commence on time (by 2Q20), if the government decides not to include the expansion work in the exemption list. Plant F40 will add an additional 4% to its current capacity. Although TOPG has sufficient workers for its existing plants, if the current restriction is expanded beyond March, TOPG might be faced with labour shortages, as foreigners are not allowed to enter Malaysia at the moment.

Reiterate BUY With a Higher TP of RM7.50

To factor in the stronger demand outlook, we are raising our EPS forecast for FY20E by 8.9% and raise our 12-month TP to RM7.50 based on an unchanged 40x PER on our CY20 estimate. Top Glove remains one of our Top BUY picks for the country and sector.

Key risks to our call include: 1) intensifying competition from other countries; 2) higher volatility in raw-material prices; and 3) worsening labor issues.

Source: Affin Hwang Research - 20 Mar 2020