What’s new

• US Customs and Border Protection (CBP) has placed a detention order on disposable gloves manufactured by 2 of its subsidiaries. The Group has organised a conference call regarding aforementioned issue. We are quite satisfied with the management’s explanations and the virtual briefing ended with a positive note in which the issue is expected to be resolved in 2 weeks’ time.

Comments

• Market overreacts to the impasse. The similar issue has been raised to Top glove which was happened to other players such as Ansell, WRP, and Karex pursuant to forced labour issue. However, we are confident in the Group as it has obtained A+ rating in labour audit from a corresponding institution, after going through over 80+ audits in 2019. The Group is likely to weather the storm in a short period of time by reimbursing estimated RM20m–50m back to the labour agents. Also, Top glove has engaged with the consultant who had helped WRP to resolve the dispute earlier, and opine that the issue is unlikely to prolong based on the past cases or experience. Additionally, we understand that the Group has complied strictly with the 104 working hours rule which renders no basis of any labour abuse.

• Demand-supply imbalance still persists. Top glove is flexible to divert the detention gloves (12.5% of total sales) strategically to any other countries to cater the overwhelming demand from North America region. At this moment, the detention gloves would be placed in Free Trade Zone accordingly for further action. Meanwhile, the record COVID- 19 cases in the region will continue to underpin the strong usage of gloves and demand is foreseen to be sustainable in the near future. In fact, the Group has received extra spot orders from nations that are currently relieved or spared from coronavirus as these governments pre-empt to the potential 2nd wave of COVID-19. Although the ASPs from the U.S orders are slightly higher compared with other countries or regions, we think the impact is not significant to the Group’s overall bottom line.

Earnings Outlook/Revision

• We revise down our FY20F net earnings forecast by 2.8% to account for estimated RM45m payment to labour agents. Meanwhile, maintain our net earnings forecast for FY21F and FY22F.

Valuation & Recommendation

• We advocate BUY on weakness with an unchanged target price of RM25.40. Our target price is pegged at 30x CY21F PER, which is in line with its 5-year historica mean PE on the back of brighter industry outlook as underpinned by the prevailing coronavirus pandemic, paradigm shift of long-term glove demand with higher hygienic consciousness coupled with rising US healthcare expenditure in coming years pursuant to potential win of Democratic candidate Joe Biden in upcoming US presidential election as empirical evidence suggests that glove manufactures are set to benefit from healthcare spending expansion by the U.S pursuant to comeback of Patient Protection and Affordable Care Act (PPACA) or “Obamacare”

Source: JF Apex Securities Research - 17 Jul 2020