What’s New

• Robust demand from developed nations. We participated TopGlove’ analyst and fund manager conference call briefing yesterday and felt optimistic on its coming quarters’ prospects. We were told that there is a very strong demand from certain countries namely, Italy, Australia, and the United States due to explosive coronavirus outbreak within these countries. Demands from China, South Korea, Singapore and Hong Kong had been strong before the current outbreak in western regions. According to the management, the Group will fulfill the orders based on the severity of COVID-19 cases instead of hoarding practice from other orders.

• Higher ASP expected. The Group will increase the average selling price (ASP) of gloves by 3 to 5% on the back of huge demand orders. Operational wise, the management saw mild business interruption from movement control order (MCO) as well as labour shortage.

• Plants are running smoothly. The Group is currently running hard to fulfil the global demand on gloves with almost full capacity (>95%) utilization rate of existing plants. There is no supply disruption for TopGlove during MCO and the Group’s other operation arms remain intact with the aid of internet technology although part of its staff are work from home. Notably, the production lines are currently operating 24-hours with 2 shifts.

Comments

• Looking for commendable profit margins. TopGlove has guided 20–40% net profit margin increase from 1HFY2020 for the following 2 quarters of the financial year amid low material prices for butadiene, nitrile latex, and natural rubber. The demand for raw material prices will go down amid low demands from automakers in Asia because of closure of plants. We expect the Group returns to double-digit net profit margin for FY2020F from single-digit profit margin recorded in 1HFY2020.

• Reversing trend on certain regions. The demand from North America is expected to come back from a negative growth (-8.4%) in 2QFY2020 although it had been stocking up before the outbreak. We believe the leap and bound cases of COVID-19 in the US will boost TopGlove’s orders even with sufficient inventory imported in beginning of CY2020.

• Postponement of Olympic 2020. The Group has received heavy demand from Japan for preparing this grand sport event. However, the postponement of Olympic 2020 to CY2021 defers some of the orders. Nevertheless, we believe the demand will resume in CY2021 as the country is one of the highest gloves usage per person in the world.

Earnings Outlook/Revision

• We revise upward our FY20F earnings forecasts by +16.7% to RM569.1m from RM487.6m on the expectation of sustainable strong demand for gloves in the next few months and weakening of MYR against USD.

Valuation & Recommendation

• Maintain BUY with a higher target price of RM7.60 (previous target price of RM6.50) 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 - 27 Mar 2020