At Top Glove’s (TOPG) 2Q FY20 results briefing, management was positive about the outlook for the sector as orders for its production lines has been secured until August 2020. Management also provided some optimistic guidance for both sales volume and ASP, which are tracking slightly ahead of our expectations. We raise our 12-month TP to RM7.70 and reaffirm our BUY call.

Expecting a Strong 2HFY20

Management is expecting TOPG’s sales volume to increase by 16% qoq to 15.8bn pcs in 3QFY20, as it has already secured the required orders until 4QFY20. To meet the demand, TOPG had increased the production utilisation rate to 90% from 85% from the start of 2020, and is working towards a 100% utilisation rate. However, we believe that the goal in not achievable for now, due to the movement control order which only allows 50% of its workforce to operate, as the restriction limits the total number of people allowed in the factory. Although there are also some disruptions in the current supply chain, management believes it is still manageable.

Price Increase Is Unavoidable

Management also provided some indication on the ASP trend for 2HFY20. Apart from the price increase implemented in Feb, TOPG is planning to increase the ASP by a further 3-5% per month over the next 3 months. This is significantly higher than our expectations, as we had only factored in a 5-10% ASP hike for 2HFY20. Due to the glove shortage, governments across the world have started procuring gloves directly from manufacturers. We believe that there is more upside for margin improvement, as we expect raw material prices to fall in tandem with the oil price.

Maintain BUY Rating With Higher TP of RM7.70

We have raised our EPS for FY20-22E by 3.8-5.0% to factor in the stronger demand and higher margins as guided by management. As a result, we raised our 12-month TP to RM7.70, based on an unchanged CY20E PER of 40x. Top Glove remains one of our top BUY picks for the sector and country. Downside risks to our call would be a sharp appreciation of the Ringgit, and sharp increase in raw-material prices.

Source: Affin Hwang Research - 27 Mar 2020