• Top Glove registered a net profit of RM2b during 3QFY21 which depleted 29% qoq but soared 485.3% yoy. Meanwhile, revenue stood at RM4.2b, deteriorating 22.4% qoq but escalating 146.6% yoy.
• As for 9MFY21, the Group’s net profit of RM7.3b jumped 1166.3% yoy amid strong revenue of RM14.3b, surging 246.2% yoy given strong gloves sales volume, rising 12% yoy on the back of higher blended average selling price (ASP) during Covid-19 pandemic.
• Within expectation. Top Glove’s 9MFY21 net profit of RM7.3b was within our in-house and market expectation which accounted for 78.5% and 73.7% of full year earnings estimates respectively.
• Dividend declared. The Group has declared a single-tier third interim dividend of 12.7sen/share during 3QFY21 as well as a special single-tier third interim dividend of 5.3sen/share which bring total interim dividend payout of 18sen/share during 3QFY21. Overall, Top Glove has a total dividend payout of 59.7sen/share as of 9MFY21 which translates into a dividend yield of 12.3%.

Comments

• Export ban to US coupled with softening ASP eased QoQ performance. Top Glove’s revenue down 22.4% qoq due to lower sales quantity (-4% qoq) as well as lower blended ASP (-16% qoq). Nitrile glove sales quantity shrank 13% qoq on the back of soothing ASP (-20% qoq) given sales affected by temporary halt in shipment to the US market from Malaysia pursuant to allegation of forced labour issue. Also, softening ASP was due to adjustment on market pricing as well as lower sales from the US market given its higher pricing (compared to non-US market). Nevertheless, sales for natural rubber picked up by 4% qoq given sturdy demand from developing countries. Besides, profit before tax (PBT) margin tumbled by 6.9ppts qoq following higher material prices as prices of natural latex and nitrile latex increased 8% qoq and 0.4% qoq respectively. Additionally, sales volumes from North America and Western Europe tumbled by 68% qoq and 14% qoq respectively during this period.
• Higher ASP boosted YoY growth despite lesser sales volume. Revenue improved 146.6% yoy, thanks to higher blended ASP despite disappointing sales volume (-9% yoy). Sales volume for nitrile, natural rubber, and surgical gloves depleted 20% yoy, 1% yoy and 34% yoy respectively despite strong sales growth in vinyl gloves (+101% yoy). Besides, PBT margin improved by double-digit point to 37.5ppts yoy in line with strong revenue despite higher natural latex price (+45% yoy) as well as nitrile latex price (+138% yoy), given better operational efficiency.
• Encouraging 9MFY21 as expected. Cumulatively, both revenue and PBT jumped 246.2% yoy and 1290.2% yoy banking on by its strong demand for gloves during Covid-19 pandemic. Sales volume during 9MFY21 soared 12% yoy as compared to 9MFY20. As for following quarter, the Group expects sales volume to pick up with an expectation of uplifting ban from U.S. Custom and Border Protection (CBP). Additionally, management highlighted that ASP to continue to ease going forward in line with market pricing given lesser demand from the US market as well as lower material cost. Nevertheless, the Group remains optimistic on the overall global glove demand given it is an essential item during Covid- 19 pandemic.
• Lesser lead times and no spot order at this juncture. The Group said that current order lead times are about 90-120 days (depends on type of products), much lesser as compared to previous quarter given its softening order. Also, the Group said that no more spot order going forward as production capacities are enough to cater the glove demand.
• Latest updates on the U.S CBP and HK listing. Management highlighted that no timeline being given on the settlement of Withhold Release Order (WRO) status by U.S CBP. Nevertheless, the Group has achieved all requirements set by International Labour Organization (ILO) 11 Forced Labour Indicators. Besides, the Group is devoted to improve on its Environmental, Social & Governance (ESG) by focusing on five key areas such as product quality & safety, occupational health & safety, talent retention, human right & labour practices as well as reduction of carbon emission as an effort to ensure the sustainability of every aspect of the business. As for its Hong Kong listing plan, the Group mentioned that they are still in discussion with the advisor on the listing date and expect the plan to materialise after settling its shipments issue with U.S CBP.

Earnings Outlook/Revision

• No changes on our FY21F and FY22F net earnings forecasts.

Valuation & Recommendation

• Maintain HOLD with a lower target price of RM5.20 (RM5.80 previously) as we assign lower PE in view of soothing earnings on coming quarters as global vaccination programs have been rolled out in a large scale recently. Our target price is now pegged at 11.9x FY22F PER of 43.7sen, slightly higher than 5 years -1 standard deviation of 11.3x. 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 Jun 2021