• Top Glove reported a strong set of results with FY20 PATAMI at RM1.87bn (+412% yoy) – above both our and consensus expectations, as it constituted 133% and 122% of the respective forecasts
• Although still under the retention list by the CBP, TOPG was able to deliver a 4.9% qoq increase in sales volume due to strong demand
• We are raising our EPS for FY21/22E by 18.1%-46.6%, as the company continues to guide for higher ASPs in the coming quarter. Maintain BUY with an unchanged TP of RM15.45

Glove Shortage Continues

The better-than-expected performance in 4QFY20 was mainly driven by higher ASPs, having increased by 75% qoq driven by the current shortage of gloves. Despite the sharp increase in ASPs, management guided for ASPs to rise by a further 8-20% mom over the next 3 months, which is higher than the previous guidance of +5% mom. There is a possibility that ASPs could be higher than the 5% guided beyond the next 3 months, as the current shortage of raw material (nitrile butadiene) has limited new supply, in our view. Developed countries continue to prefer nitrile gloves over natural rubber gloves due to concerns over the protein allergy issue.

Limited Financial Impact From the CBP Restriction List

Despite the restriction by CBP which has limited TOPG’s access to the US market since July 2020, TOPG has still been able to deliver overall sales volume growth of +16.6% yoy. We believe that even if TOPG is unable to resolve the problem by year-end, the impact on its profitability should be limited. Given strong demand for nitrile gloves, TOPG is still able to lock in spot orders for nitrile gloves from other countries for the next 3 months. However, we believe it would be challenging for TOPG to increase its spot allocation for nitrile gloves due to the current shortage of raw materials. The latter could also serve to deter new entrants’ plans to enter the market.

Reiterate BUY With An Unchanged TP of RM15.45

We are raising our earnings forecast for FY21-22E by 18.1%-46.6% to factor in the latest ASP assumptions. We are keeping our TP unchanged at RM15.45, as we now base it on a lower PER of 22.4x CY21E PER (historical mean pre COVID-19), due to a change in sentiment for the sector given the recent news over availability of vaccines. However, we keep our BUY call unchanged, as we believe the current share price has yet to fully factor in its full earnings potential.

Key Risks

Downside risks: (i) increased volatility in raw-material prices; (ii) shortage of foreign labourers; and (iii) prolonged ban by the US CBP.

Source: Affin Hwang Research - 17 Sept 2020