Result

• Top Glove reported a net profit of RM347.9m in 3QFY20, up 200% QoQ and 367% YoY. Quarterly revenue stood at RM1688.3m, +37.3% QoQ and +41.8% YoY. Additionally, the Group handed out an operating profit of RM429.9m which equated to 188% YoY growth.

• Robust 9MFY20 result. The Group reported a revenue of RM4147.7m in 9MFY20 which increased 14.8% YoY. Besides, the Group recorded a stellar operating profit of RM728.5m (+78% YoY). As a result, net profit came at RM580m (+100% YoY).

• Above our expectation but below consensus. 9MFY20 net profit accounts for 102%/63.4% of our/consensus full year estimates. However, the reported revenue matches 73.4% of our full year forecast.

• Divided declared. Top Glove has declared a first interim dividend of 10 sen/share. We raise our dividend forecast for FY2020F to 18 sen.

Comments

• Impressive YoY performance. Top Glove’s revenue up 41.8% YoY due to higher average selling price of gloves (+9% YoY) as well as higher sales volume across all products (+24% YoY). The Group’s operating profit increased 188% YoY because of lower nitrile latex raw material price (-14% YoY), mild drop of natural rubber (-4% YoY). Also, the Group recorded substantially higher YoY profit before tax for its 9MFY20 at RM682.6m (+106.4%) because of lower finance cost (-27.3% YoY) pertaining to higher conversion of bond to shares.

• Vigorous QoQ result. The Group recorded gains of revenue (+37.3% QoQ), operating profit (+188% QoQ), and profit after tax (+202% QoQ). These were boosted by strong sales volume growth from nitrile gloves (+27% QoQ) and natural rubber gloves (+25% QoQ), and 14% surge in surgical gloves. Also, breakeven of Vinyl gloves segment with sales volume growth of 17% QoQ. As a result, PBT and PAT elevated to RM422m and RM350m respectively (+224% QoQ/+202% QoQ) respectively. Likewise, lower raw material costs, rising economies of scale, and higher ASPs resulted in operating profit margin expanded by 13.3 ppts QoQ.

• Longer lead time. The lead time for all products escalated to average 300 days from pre COVID-19, 30 – 40 days. Orders from all around the world have taken place as a precautious move of preventing worsening of the pandemic. Germany, Taiwan, and Spain sales order inflated 572%, 416%, and 469% MoM respectively.

• Concrete evidence on higher ASPs. National cost of Personal Protective Equipment (PPE) in the US has gone up 45% (Figure 3) since March 2020 where the outbreak of COVID-19 intensified in the US. The US has the highest number of COVID-10 cases triggered the demand on gloves in the hospitals as to handle a large number of patients. Meanwhile, the country’s citizens have started to stay cautious to deal with COVID-19 by consuming more gloves and wearing masks. Moving forward, we believe the trend is set to prolong after easing of COVID-19 cases globally.

• Potential resurgence of COVID-19 infection rate in the US. “Rt Covid-19” is a key measure of how fast the virus is spreading. Currently, the values of “Rt” in 16 states (Figure 4) are above 1.0 while the number of states with “Rt” above 1.0 in 6 weeks ago (Figure 5) were just 7. We are seeing the “Rt” value is increasing in more states in the US as sign of virus to spread quickly. The spread of COVID-19 is accelerating mainly due to the US ongoing protest which started last week, as a result of the people did not practice social distancing.

Risks include:

• Limitation on further hike in ASPs. The New York’ s Governor Cuomo has signed a legislation banning price gouging of Personal Protective Equipment on 8 June 2020. The move could pressure glove manufacturer to lower the selling prices of gloves. In addition, we think other governors in the United States will follow the policy soon to halt on the rising PPE prices. The move is likely to mirror by vicinal countries such as Canada, Mexico, and South America.

• Downtrend of USD. USD has weakened against MYR since March 2020, weakening 4.67% which is in line with the decline of DXY (Dollar Index Spot) of 6.64% in the same period. Weakening of USD and rising of raw material prices upon easing of global lockdown will squeeze the Group’s profit margin as it loses out the advantage as an exporter.

Earnings Outlook/Revision

• We revise upward our FY20F and FY21F net earnings forecasts by +74% and +321% to RM992.5m and RM2,247.9m respectively. We also introduce our FY22F net profit of RM904.8m on the expectation of higher ASPs (+15%) and low raw material prices. Overall, we envisage Top Glove’s net earnings for FY20F and FY21F to grow strongly at +170.1% yoy and +126.5% yoy respectively before normalise, -59.7% yoy in FY22F.

Valuation & Recommendation

• Upgrade to BUY with a higher target price of RM22.41 (previous target price of RM7.60) after our earnings upgrade. Our revised target price is now pegged at 33x CY21F PER, which is at +0.5 SD above its 5-year historical mean PE on the back of brighter outlook in respect of resilient glove demand. We peg our valuation to CY21 instead of FY21 considering the impact of earnings normalisation in FY22F after exceptional strong profit growth in FY21F pursuant to the pandemic.

Source: JF Apex Securities Research - 12 Jun 2020