1HFY20 PATAMI of RM227m (+5% YoY) came in within expectations, at 49%/47% of our/consensus full-year forecasts. 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 RM6.10 per share. TP is RM5.95 based on 32x CY20E EPS. Reiterate MP.

Key results’ highlights. QoQ, 2QFY20 revenue rose 2% due to higher sales volume (+2%) led by latex (+11%) but more than offset lower nitrile (-4%). PBT margin improved marginally by 0.2ppt from 10.4% in 1QFY20 to 10.6% in 2QFY20 due to better efficiency from economies of scale. This brings 2QFY20 PATAMI to RM116m (+4%). No dividend was declared as expected.

YoY, 1HFY20 revenue came in flat (+0.7%) due to lower ASP (-0.1%) but mitigated by higher sales volume (+0.6%). Interestingly, ASPION showed marked improvement from low base recording a net profit of RM13m (+30%). 1HFY20 PATAMI was higher by 5% to RM227m boosted by a lower effective tax rate of 11% compared to 18% in 1HFY19.

Subsequent quarters’ earnings to be driven by new capacity expansion, potentially higher ASPs and weakening USD/MYR. Initially in the early stage of the virus outbreak, sales orders came mainly from China, Hong Kong, Singapore and South Korea. TOPGLOV has in recent weeks also received strong sales orders from Europe, US and other countries. With current utilisation levels > 90%, the group is able to further ramp up production close to 100%, to meet the surge in demand. It has new capacity coming on-stream with F2B and F5A having commenced operations, which will add 3.2bn pieces of gloves per annum, when fully operational. Ceteris paribus, each 1% increase in volume sales and ASP will raise our FY20E net profit by 1% and 1.2%, respectively.

Weakening of Ringgit (MYR) vs. US dollar (USD) is positive to rubber glove players. YTD, the USD had risen by 8% against the RM (USD1 = RM4.40). Since sales are USD-denominated, theoretically, a depreciating ringgit against the dollar will lead to higher revenue receipts for glove makers. Ceteris paribus, a 1% weakening of RM against USD will lead to an average 1%-2% increase in the net profit of rubber glove players.

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%).

Reiterate MP. TP is 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 RM6.10 per share.

A key upside risk to our call is the higher-than-expected volume sales.

Source: Kenanga Research - 20 Mar 2020