• Top Glove’s share price has underperformed the market (and its peers) since the start of November, as sentiment on the stock turned negative due to the positive development of the vaccines and a COVID-19 outbreak at its factories.
• We believe that the impact on the lockdown of its worker hostel is manageable at around 5% of FY21E earnings, which is expected to end by 14 Dec 2020.
• Similar to its peers, Top Glove is likely to deliver a strong set of results for 1QFY21E; as such we are keeping our BUY call and TP at RM15.45 unchanged.

Impact on earnings is manageable if quarantine is not extended again

Currently all of Top Glove’s (TOPG) production facilities (28 in total, 16 of them have been shut since 17 November) in Klang are expected to be closed in phases, to allow the testing of its workers due to the current outbreak. Apart from the closure of its production facilities, its worker hostel located at Meru, Klang has also been placed under EMCO, with more than 5,000 workers being placed under quarantine until 14 December 2020. Although nearly 50% of its production facilities is idle, we believe that the impact is still manageable. TOPG has rescheduled its other plants to prioritise high-margin products. We estimate that for every 2 weeks of closure, the impact on FY21E earnings is around 2-3%.

The party has not ended

Given the positive development on the vaccines, investors’ sentiment on the sector has turned less positive. However, we believe that it is still too early to look past CY21E earnings yet, given that ASP is still rising as the number of new COVID-19 cases has surged across the globe. Management also guided that the ASPs for November and December have risen by 15-20% mom. Assuming TOPG maintains its 50% of net profit dividend payout policy, the current 12-month forward dividend yield is c. 6.5%, with upside risk. Apart from that, we are also expecting future demand growth to outpace its historical growth rate of 8%, which could drive valuation higher for TOPG.

Maintaining BUY, with an unchanged TP of RM15.45

We are maintaining our BUY call at the moment, as we believe that Top Glove can resume full production before end of 2020, and it would be fully compliant with the regulations set by the government too. Hence, we think the impact on earnings is still manageable. We have also kept our EPS forecasts and TP unchanged at RM15.45. TOPG is expected to announce its 1QFY21 results on 9 December.

Source: Affin Hwang Research - 3 Dec 2020