Result

• Top Glove posted a net profit of RM2.4b in 1QFY21, surging 83.9% qoq and 2032.7% yoy. On the same note, revenue stood at RM4.8b which climbed 53.1% qoq and 293.6% yoy.
• Exceeding our expectation but within street estimates. 3MFY21 net profit of RM2.4b was substantially above our in-house expectation (50%) but in line with street estimates (27.9%). The better-than-expected results were spurred by robust gloves demand as well as higher average selling price (ASP).
• Divided declared. The Group has declared a single-tier interim dividend of 16.5 sen/share (accounts for 16.8% of our full year dividend forecast) which is higher than 1QFY20 of 4sen/share and even exceeds full year FY20 dividend of 11.83 sen/share.

Comments

• Robust QoQ growth. Top Glove’s revenue improved 53.1% qoq, buoyed by better sales quantities in natural rubber gloves (+6% qoq) coupled with vinyl gloves (+37% qoq) which offset disappointing sales quantities in nitrile gloves (-8% qoq) and surgical gloves (-15 qoq). We understand that contraction in nitrile gloves sales was due to closure of Klang factories while lower surgical gloves sales was due to change in production line to nitrile gloves in view of lesser demand. Also, ASPs were higher during this period as natural rubber gloves (+48% qoq), vinyl gloves (+61% qoq), nitrile gloves (+76% qoq) and surgical gloves (+34% qoq) following robust demand. Other than that, operating profit and PBT increased by 12.7ppts and 12.8ppts to 90.2% qoq and 90.7% qoq respectively.
• Stellar YoY performance. Top Glove’s revenue soared 293.6% yoy given higher sales quantities of nitrile gloves (+18% yoy), natural rubber gloves (+18% yoy) and vinyl gloves (+116% yoy) despite soothing sales quantity of surgical gloves (-3% yoy). Additionally, ASP for nitrile gloves (+268% yoy), natural rubber gloves (+168% yoy), surgical gloves (+77% yoy) and vinyl gloves (+230% yoy) also inched up higher in tandem with prevailing market prices. Besides, operating margin/profit grew by 53.3ppts/2086.7% yoy while PBT inched up 54.7ppts/2366.5% yoy on the back of steady sales outputs, higher ASPs as well as greater utilization rate (>95%).
• Lesser lead times and tapering off of ASP growth for nitrile and natural rubber gloves. The current lead times for nitrile and natural rubber gloves deteriorated to 510 days and 340 days from 620 days and 400 days respectively during Aug’20 following cancelation of orders by customers due to pricing issue and waiting time period. Nevertheless, the management guided that the proportion was minimal, less than 3% of total sales. Meanwhile, surgical and vinyl gloves’ lead times increased to 260 days and 170 days respectively (from 250 days and 110 days respectively in Aug’20) given its steady demand. On the other hand, its ASP growth is envisaged to taper off moving forward as we understand that its nitrile glove’s ASP is expected to grow to 15%/10%/5% mo-m for Dec/Jan/Feb 21 from 30%/15%/10% m-o-m in Oct/Nov/Dec 20. In a nutshell, the Group anticipates its blended ASP to grow 30% from current quarter to 2QFY21 given its outstanding orders.
• Mid-term plan to lift workers’ housing conditions. In view of recent Covid-19 cases detected on Top Glove’s workers as well as investigation by Malaysian government over poor accommodation conditions of its foreign workers, the Group intends to allocate more capex of approximately RM100m on improving accommodation arrangement mainly for its new hostel and houses which will be fully equipped with better facilities and amenities. The Group plans to allocate RM70m for Klang and Banting areas while RM30m in other locations which include Perak, Kedah, Negeri Sembilan and Johor. Meanwhile, the Group said that all of its 28 Klang factories will start to operate in stages (currently at stage 1) and expect to see them to be fully reopened and running at normal productions within the next two to three weeks. Also, c.90% of its Covid-19 workers who had been tested positive earlier has recovered since then and able to return to works in a short period of time.
• Continuous engagement with U.S. Custom and Border Protection (CBP). Currently, Top Glove is actively engaging with CBP to resolve the issue expeditiously and looking forward to wrap the case soon. In conjunction with the CBP matters, sales in America were affected as sales quantity in North America was down 2% yoy. Nevertheless, it was more than offset by Western Europe and Eastern Europe which experienced double-digit growths of 70.2% yoy and 56.3% yoy respectively given sudden surge of third waves of Covid19 cases.

Earnings Outlook/Revision

• In view of our lower-than-expected forecast, we revise upwards our FY21F and FY22F net earnings by respective 70.2% and 138.5% to RM8.0b and RM3.1b. This is based on expectations of better profit margin and higher ASP (+30%) assumption for FY21F and FY22F. Overall, we envisage Top Glove’s net earnings to grow strongly, +357% yoy for FY21F before normalising in FY22F, +62% yoy.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM6.83. Our target price is now pegged at 18.1x FY22F PER of 37.7sen. Our valuation is assigned to FY22, considering the impact of earnings normalisation after exponential yet exceptional strong profit growth in FY21F pursuant to the pandemic. Market is forward looking and hence we opine that current share price is looking beyond its prevailing peak earnings and start to price in recovery theme for next year upon successful massive vaccination.

Source: JF Apex Securities Research - 10 Dec 2020