Result

• Top Glove posted 2QFY21 net profit of RM2.9b, which soared 20.8% qoq and 2379.7% yoy. Meanwhile, revenue jumped to RM5.4b which climbed 12.7% qoq and 336.3% yoy.

• As for 1HFY21, the Group’s net profit of RM5.2b escalated 2209.5% yoy on the back of massive revenue of RM10.1b, surging 315.1% yoy.

• Exceeding our expectation but within street estimates. 6MFY21 net profit of RM5.2b was substantially above our in-house expectation (65%) but in line with street estimates (51%). The better-than-expected results were underpinned by higher gloves sales volume, rising 25% yoy.

• Second interim dividend declared. The Group has declared a single-tier interim dividend of 25.2sen/share during 2QFY21 which comprises 20% special dividend payout and 50% normal dividend. Overall, Top Glove has a total dividend payout of 41.7sen/share as for 6MFY21 which translates into a dividend yield of 8%.

Comments

• Higher average selling price (ASP) lifted QoQ growth despite soothing sales volume. Top Glove’s revenue/PBT increase 12.7% qoq/20.3% qoq banking on higher ASP despite moderation in rubber glove sales volume. ASP for nitrile/natural/vinyl gloves up 30% qoq/14% qoq/28% qoq despite easing ASP for surgical gloves (-18% qoq). Meanwhile, soothing sales quantities was due to closure of Klang factories during Nov’20 and Dec’20 in view of spike in Covid-19 cases which led to temporary stoppage in production. Sales quantities for nitrile/natural/surgical/vinyl gloves were down 2%qoq/13%qoq/24%qoq/3%qoq during this period. On the other hand, both operating profit margin and PBT margin registered double digit margin of 12.1% and 10.6% respectively which improved by 4.4ppts banking on improved production cost efficiency.

• Encouraging sales quantities coupled with steady ASP boosted YoY performance. Top Glove’s revenue escalated 336.3% yoy, thanks to higher sales volume (nitrile: +17% yoy; natural: +19% yoy; and vinyl: +174% yoy) given its sturdy demand on the back of higher ASP (nitrile: +380% yoy; natural: +216% yoy; surgical: +55% yoy and vinyl: +274% yoy) in view of shortages in supply. Besides, operating profit margin and PBT margin also higher which grew by 57.3ppts and 58.8 ppts respectively on the back of steady sales outputs, higher ASPs, greater utilization rate (>95%) as well as rationalisation of product mix.

• Sturdy 1HFY21. Cumulatively, both revenue and PBT jumped 315.1% yoy and 2565.3% yoy spurred by its strong demand for gloves during Covid-19 pandemic. Western Europe (+62% yoy) registered highest sales quantities during 1HFY21 given its massive Covid-19 cases there. Also, higher sales volume was followed by Asia ex Japan (+48% yoy) and Eastern Europe (+39%). North America showed marginal increase of 6% yoy as sales quantities affected by U.S. Custom and Border Protection (CBP).

• Lesser lead times and tapering ASP growth for rubber gloves. The current lead times for nitrile and natural rubber gloves deteriorated further to 170 days and 240 days in 2QFY21 from 510 days and 340 days respectively previously, in line with current situation as vaccination programme has taken place gradually. Also, surgical and vinyl gloves’ lead times down to 240 days and 30 days from 260 days and 170 days respectively. On the other hand, its ASP growth is envisaged to taper off moving forward as we expect glove demand will be easing off going forward in conjunction with higher vaccination rate among population in addition to the incoming competition.

• Latest update on U.S. Custom and Border Protection (CBP). Currently, Top Glove has submitted Corrective Active Plans for CBP’s review and approval. The Group will actively engage and follow up with CBP to resolve the issue expeditiously and looking forward to wrap the case soon. Also, Top Glove has appointed independent consultant to help them to rectify these issues. Also, the Group is devoted to improve on ESG towards its foreign worker issues such as fair recruitment practices, worker’s accommodation, working hours and wages of workers, safety and health of workforce as well as stringent safety measure in workplace.

• Proposed Dual Primary Listing in HKEX. On 26th Feb 2021, the Group has proposed Dual Primary Listing in Hong Kong Exchange (HKX). The proceeds will be mainly use d for expansion of production capacity and developing a data-driven manufacturing system. The management is optimistic that the dual primary listing as an additional platform for Top Glove with more financing flexibility, increasing investors and business outreach, raising proceeds to fund its business expansion as well as upgrading corporate governance. Additionally, the proposed listing is expected to lead to strong EPS and DPS despite its dilution impact.

Earnings Outlook/Revision

• In view of our lower-than-expected forecast, we revise upwards our FY21F and FY22F net earnings by respective 16.3% and 16.1% to RM9.3b and RM3.6b. 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, +429% yoy for FY21F before normalising in FY22F, -61% yoy.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM5.80 (RM6.83 previously) as we assign lower PE in view of softening earnings on coming quarters as global vaccination programme has been rolled out recently.

Our target price is now pegged at 13.3x FY22F PER of 43.7sen. 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 looks beyond its prevailing peak earnings and starts to price in recovery theme upon successful mass vaccination globally.

Source: JF Apex Securities Research - 10 Mar 2021