Result

• Top Glove reported a net profit of RM116.0m in 2QFY20, up 4.1% QoQ and 8.7% YoY. Quarterly revenue stood at RM1229.7m, +1.7% QoQ and +6.6% YoY. Additionally, the group handed out an operating profit of RM149.3m which equated to 2.7% YoY growth.

• Moderate 6MFY20 result. The group reported a revenue of RM2438.8m in 6MFY20 which increased marginally by 0.7% YoY. Besides, the group recorded a stagnant operating profit of RM305.1m (-4.7% YoY). As a result, net profit came at RM227.4m (+4.9% YoY).

• Within our expectation and consensus. 6MFY20 net profit accounts for 49.0%/47.5% of our/consensus full year estimates.

Comments

• Slightly better YoY performance. Top Glove’s revenue up 6.0% YoY due to higher average selling price of natural rubber glove (+9% YoY) as well as higher sales volume for nitrile gloves (+14% YoY). The Group’s operating profit increased 2.7% YoY because of lower nitrile latex raw material price (- 8% YoY), mild natural gas price hike (+3% YoY) and better operating efficiency from a large scale of production. Also, the group recorded marginally higher YoY net profit for its 6MFY20 to RM227.4m (+4.9%) because of lower tax expenses (- 23.7% YoY) pertaining to tax incentives. We believe the flattish of total sales volume (+1% YoY) due to fixed number of medical practitioners in our existing healthcare system globally and couldn’t be increased significantly in a short time of period. World Health Organization (WHO) estimates 76 million examination gloves needed per month.

• Flattish QoQ result. The Group recorded gains of revenue (+1.7% QoQ), operating profit (+5.4% QoQ), and profit after tax (+3.8% QoQ). These were boosted by strong sales volume growth from latex powdered gloves (+16% QoQ) and surgical gloves (+18% QoQ). Also, better results from Aspion underpinned the overall bottom line in which 1HFY20 recorded 125% of FY19.

• Expansion plans come at the right time. The Group has two new plants coming to serve namely F2B and F5A which will add extra 24 lines/3.2 billion capacity to the existing production lines. Aggregately, the current 711 production lines/73.4 billion of production believe to be able to cater the strong demand from America and Eurozone where the places in COVID-19 outbreaks.

• Higher equity base. The Group issued a RM1.3 billion Sukuk (perpetual bond) on 27 February 2020 which will be utilized

for the future expansion plans. We opine that gearing up by issuing perpetual bond during the low interest rate environment is encouraging for the Group as it will strengthen its balance sheet with higher equity base to RM3981.2m (+55% YoY) from RM2536.9m. Likewise, the Group’s net gearing is reduced to 0.24 times.

• Risks include: 1) Lower than expected demand for gloves, 2) Possible COVID-19 labour infection to disrupt production.

Earnings Outlook/Revision

• We revise upward our FY20F earnings forecasts by +4.7% to RM487.6m from RM465.4m on the expectation of strong USD against MYR to be persisted in the next few months.

Valuation & Recommendation

• Upgrade to BUY with a higher target price of RM6.50 (previous target price of RM4.73) after our earnings upgrade. Our revised target price is now pegged at 34x FY20F PER, which is at +1 standard deviation 5-year historical mean PE on the back of brighter outlook in respect of resilient glove demand.

Source: JF Apex Securities Research - 20 Mar 2020