Signs of a Covid-19 led demand pick-up for nitrile gloves that accelerates re-stocking activities are pointing towards a better sequential quarter in 2QFY20. As such, we upgrade our FY20E/FY21E net profit by 12%/12%. The share price could however, be capped by the conversion of exchangeable bonds. Recall, back in 2019, Top Glove issued USD200m in convertible bonds as part of their debt restructuring. The bonds can be converted into new shares at RM6.20/share. TP is raised from RM5.30 to RM5.95 based on 32x CY20E EPS. Reiterate MP.

Expect a solid 2QFY20. Signs of pent-up demand for nitrile gloves, potentially on re-stocking activities, are pointing towards a better sequential quarter in 2QFY20. We expect its 2QFY20 PATAMI, which is due to be released latest by end-Mar, to be higher QoQ and YoY due to new capacity expansion underpinned by pent-up demand. Note that 1QFY20 PATAMI came in at RM111.4m (+39% QoQ; 1.2% YoY)

Nitrile gloves' market share to gain momentum. We expect nitrile gloves to continue growing and grabbing market share from latex gloves. The industry growth in nitrile segment is evident. For illustration purposes, going forward, assuming nitrile:latex breakdown of 80:20 (67:33 currently) and based on estimated global demand of 324b pieces in 2020 (forecast for 2019 was 300b pieces and assuming 8% growth rate in 2020), this implies nitrile growth rate of 30% or an additional 51b pieces from the switch to nitrile gloves. From our ground checks, demand for nitrile gloves is picking up again where players’ new capacities are being swiftly taken up. Ceteris paribus, a 1% increase in volume sales will raise our FY20E net profit by 1%.

Expansion plans. Top Glove’s capacity expansion include: Factory 7A (operational by end-1Q 2020; 0.4bn pieces latex gloves), Factory 2B (operational by 1Q 2020; 0.7b pieces nitrile gloves), Factory 5A (operational by 1Q 2020; 2.5b pieces nitrile gloves), Factory 40 (Phase 1 operational by 2Q 2020 and Phase 2 operational by 3Q 2020; 2.7b and 2.0b pieces, nitrile gloves, respectively), Factory F41 (operational 2Q 2020; 4b pieces PVC gloves) and Factory 8A (operational by 4Q 2020; 3.5b pieces nitrile gloves) which will boost the group’s total production capacity in 2020 by 11.8b gloves per annum to 81.9b (+17%).

Raised FY20E/FY21E net profit by 12%/12% taking into account higher growth for volume sales from 5%/8% to 12%/14%.

Maintain MP. Correspondingly, our TP is raised form RM5.30 to RM5.95 based on unchanged 32x CY20E EPS (at +1.5SD above 5-year historical forward mean). The share price could be capped by the conversion of exchangeable bonds. Recall, back in 2019, Top Glove issued USD200m in convertible bonds as part of their debt restructuring. The bonds can be converted into new shares at RM6.20/share.

A key upside risk to our call is the better-than-expected volume sales and margin.

Source: Kenanga Research - 9 Mar 2020