Result

• Top Glove reported a net profit of RM1291.9m in 4QFY20, soaring 271.3% QoQ and 1641.1% YoY. Quarterly revenue stood at RM3109.1m, which surged 84.2% QoQ and +161.5% YoY. Additionally, the Group posted an operating profit of RM1627.6m, up 1585% YoY growth.
• Robust 12MFY20 result. The Group clinched a revenue of RM7236.3m in 12MFY20 which increased 50.7% YoY. Besides, the Group recorded a stellar operating profit of RM2355.8m (+360.4% YoY). As a result, net profit came at RM1903.8m (+413.8% YoY).
• Above our/consensus expectations. 12MFY20 net profit accounts for 150%/126.7% of our/consensus full year estimates. However, the reported revenue matches 103% of our full year forecast.
• Divided declared. Top Glove has also declared a final dividend of 8.5 sen/share. Hence, bringing full fiscal year dividend to 11.8 sen.

Comments

• Stunning YoY performance. Top Glove’s revenue up 161.5% YoY in 4QFY20 mainly driven by higher average selling price (ASP) of two major products - nitrile gloves (+114% YoY) and natural rubber gloves (+81% YoY). Meanwhile, sales were further accelerated by higher sales volume for both products, +114%/+43% YoY respectively. The Group’s operating profit increased 1585% YoY because of better operating utilization rate (>95%). Also, the Group recorded a substantially higher YoY profit before tax for its 12MFY20 at RM1903.8m (+413.8%) because of lower finance cost (-49% YoY) pertaining to higher conversion of bond to shares and RM654m syndicated loan which was fully settled.
• Stellar QoQ result. The Group recorded gains of top line (+84.2% QoQ), operating profit (+278.6% QoQ), and profit after tax (+278.9% QoQ). These were boosted by strong ASP for nitrile gloves (+103% QoQ)/natural rubber gloves (+77% QoQ) despite a slight increase in sales quantity for both products (+5%/+4% QoQ). Notably, vinyl gloves recorded a fabulous turnaround which delivered +90%/+64% in sales quantity/ASP in 4QFY20. As a result, PBT/PAT elevated +284.7%/+278.9% QoQ. Likewise, mild increase of nitrile latex (+3.3%), rising economies of scale, and higher ASPs resulted in operating profit margin expanded by 26.9 ppts QoQ.
• Longer lead time. The lead time for nitrile and vinyl gloves escalated to average 620 days and 250 days respectively from July 20, indicating momentum for glove demand remains intact. However, lead time for other 2 products (natural rubber & surgical) have seen slight pull back in which the lead time have fallen to 400 days and 110 days respectively. Overall, the strong lead time is believed to be supported by huge quantity demand from Asia ex Japan (+110.3% YoY), Western Europe (73.0% YoY), and Eastern Europe (63.7% YoY) in 4QFY20.
• Huge capex planning ahead. We were told by the management that the Group has earmarked on RM8 billion for capex over the next 6 years to cater for resilient global demand growth for the next decade. The Group will be focusing on new capacity, enhancement of existing manufacturing facilities, Industry 4.0 initiatives, a gamma sterilisation plant, land bank for future expansion, IT upgrades and workers’ facilities.
• No significant development on withhold release order by U.S. Custom and Border Protection (CBP). The Group has been actively engaging with the U.S CBP over the weeks to resolve the issue expeditiously. In the meantime, the Group has successfully remediated 2 payments, each at RM4.4m in August and September 2020. Moreover, the Group conducted an independent audit which entailed virtual interview of about 1000 workers. However, the sales quantity for North American came down 6.5% during 4QFY20 and 5.2% for FY2020 amid acute shortage of gloves

Risks

• Potential unfavourable outcome from the US market. Management believes that the US detention issue is likely to be resolved before end of 2020. However, it is premature to pre-empt any outcome at this moment. The Ebos, which is New Zealand's largest personal protective equipment (PPE) supplier, has stopped importing a brand of gloves by Top Glove, indicating or signalling a possibility of North American countries to stop importing gloves from the Group pertaining to the issue.

Earnings Outlook/Revision

• We revise upwards our FY21F net earnings forecasts by 74% to RM4,716.4m but lower FY22F by 7.7% to RM1,344.9m. This is based on expectations of better profit margin and higher ASP (+30%) assumption for FY21. However, the slight earnings cut for FY22 is due to our belief that the ASP momentum is likely to taper off in 2HCY2021 on the back of rising competition coupled with massive adoption of vaccine as well as elevated raw material prices. Overall, we envisage Top Glove’s net earnings to grow strongly, +147.7% YoY for FY21F before normalising in FY22F, -71.5% YoY.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM6.83 (previous target price of RM8.47) after our earnings adjustments and market expectation of looking beyond peak earnings. Our revised target price is now pegged at 18.4x CY21F PER, which is at -0.75 SD below its 5-year historical mean PE by taking into account potential prolonged US detention order, in our view, which could drag the Group’s overall profit margin with the absence of the US market as its major export destination. We peg our valuation to CY21 instead of FY21 considering the impact of earnings normalisation in FY22F after exponential yet exceptional strong profit growth in FY21F pursuant to the pandemic.

Source: JF Apex Securities Research - 18 Sept 2020