• Top Glove (TOPG) reported a strong set of results for 1QFY21, as PATAMI of RM2.4bn (+84% qoq) was above both our and consensus expectations, delivering 31% and 27% of the respective forecasts
• Management guided for ASPs to increase by at least 30% qoq in 2QFY21 due to the current robust demand. ASPs increased by more than 50% qoq in 1QFY21
• We are raising our EPS forecasts to factor in the sustained ASP trend, but reducing our TP to RM10.10, as we roll forward our valuation base to CY22E from CY21E. Reiterate BUY. An interim DPS of 16.5 sen was also announced.

Strong demand led to higher ASPs

Similar to its peers, the better-than-expected performance in 1QFY21 for TOPG was mainly driven by higher ASPs, as overall ASP for the quarter had increased by more than 50% qoq, but overall volume has remained flattish. Management is also confident that the demand outlook remains positive, as they are guiding for 2QFY21 ASPs to increase by at least 30% qoq, which is higher than our previous expectation. We are expecting volume growth to resume in the following quarters, as the stagnant growth in 1QFY21 was due to a supply disruption given close to 50% of its workers were placed under quarantine due to the outbreak of the COVID-19.

Managing the long lead times

The overall lead times for both the nitrile and latex glove have been reduced by 60-110 days to 510 days and 340 days respectively, which came as a negative surprise to us. However, management guided that they are actively managing the lead times, as the long lead times previously had encouraged speculative buying. TOPG had also managed to secure additional supply of raw materials, which helped to shorten the overall lead times. Although there were some order cancellations by its customers, the cancellations are less than 3% of its current orders, and believe not all are attributed to the social compliance issue reported recently. We believe that overall demand remains robust, as spot orders for the next 3 months are full.

Reiterate BUY with a lower TP of RM10.10

We are raising our EPS forecasts for FY21E-23E by 26%-90% to factor in our latest ASP assumptions. However, we are lowering our TP to RM10.10 from RM15.45, as we move the valuation base to CY22E from CY21E, while pegging it to a lower 22.7x PER (based on historical average pre-COVID19), due to the recent change in sentiment, as investors are more concerned about the profitability post COVID-19. Nevertheless, we believe the stock valuation is undemanding, and reiterate BUY.

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 - 10 Dec 2020