• Top Glove (TOPG) reported a decent set of results; core-PATAMI of RM5,227m (+2,201% yoy) came in above our expectations but within consensus estimates, delivering 56% and 51% of respective forecasts
• TOPG’s PATAMI in 2QFY21 increased by 22% qoq, supported by a 24% qoq increase in its ASP, despite sales volume contracting by 8% qoq
• We are lowering our TP to RM6.65, as we cut our target valuation multiple to 15x (from 22.7x), as we believe that the current proposal to raise new equity would likely cap upside. Reiterate BUY due to its undemanding valuations

Continue to Benefit From Higher ASP

Due to the Covid19 at its factories in Nov and Dec 2020, TOPG’s production facilities were not able to operate at full capacity, which resulted in an 8% qoq decline in overall sales volume. However, due to the strong demand for rubber gloves during the quarter, TOPG was able to raise its ASP by around 24%, which was more than sufficient to compensate for the decline in sales volume. While raw-material prices also spiked during the quarter, the overall ASP increases were also sufficient to cover the higher cost, as EBITDA margin improved to 71% in 2QFY21 from 66% in 1QFY21. The margins could have been better, as TOPG had to fulfil lower-priced backlog orders which were meant for November (1QFY21), due to the supply disruption that happened earlier.

ASP Peaking in 2021, as Expected

Management had also guided that they are expecting blended ASP to trend higher in 3QFY21, mainly supported by the increase from latex gloves, while expecting nitrile glove prices to start trending lower. TOPG also believes that profit margins would continue to improve as they are expecting lower raw-material prices in 2HFY21. Interestingly, while other glove makers are still raising their ASPs for nitrile gloves, TOPG mentioned that it will be lowering its prices, to reduce the pricing difference against its peers as the current selling price is already above US$100/k pieces. We are not surprised by this, as we are already expecting softer demand in 2H21, as more people get vaccinated.

Maintain BUY due to undemanding valuations but with a lower TP of RM6.65

We are raising our EPS forecast for FY21 by 3.2% to factor in the new ASP assumptions, but maintain our profit forecasts for FY22/23. Despite the decent performance, we are lowering our TP to RM6.65 based on 15x CY22E PER (from 22.7x previously) which is at -1SD of its historical average to factor in the potential dilution from the new equity raising proposal. Despite lowering our TP, we still believe that current valuations remain undemanding, hence we are maintaining our BUY call.

Source: Affin Hwang Research - 10 Mar 2021