Taking cue from results of the other glove players announced over the past few days, we believe we may have still underestimated the potential impact from higher-than-expected ASP amidst the current tight supply situation for gloves with buyers aggressively stockpiling critical medical supplies. Hence, we raised our FY20E/FY21E net profit by 15%/27%, to account for higher ASPs. TP is raised from RM12.60 to RM15.60 based on unchanged 36x CY21E revised EPS. Reiterate Outperform.

Abnormal demand leading to acute shortage and higher-thanexpected ASP. We highlight that the market is still under-appreciating the potential impact from higher-than-expected ASPs in this continuing pandemic and tight supply condition. Due to the tight supply, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after due to limited supply. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. In the most recent analysts’ briefing, management highlighted that requests for huge volumes of gloves to the tune of 400m to 500m pieces are coming from countries that include Spain, France, Italy, Germany, and Saudi Arabia. This lends us the confidence that mid to high-teens growth in volume sales are achievable in FY20 and FY21 since orders have been secured up till end Dec 2020 to early 2021. The robust demand has led to longer delivery lead times which has risen to >300 days from 80 to 100 days compared to two months ago.

Subsequent quarters’ earnings to be driven by higher volume sales and higher-than-expected ASPs. Initially in the early stage of the virus outbreak, sales orders came mainly from China, Hong Kong, Singapore and South Korea. As the pandemic spread westwards, TOPGLOV has also subsequently, received strong orders from Europe, US and other countries. With current utilisation levels at >90%, the group is able to further ramp up production close to 100%, to meet the surge in demand. It has new capacity that came on-stream with F2B and F5A having commenced operations recently, which added 3.2b pieces of gloves per annum.

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

Raised FY20E/FY211E net profit by 15%/27% after hiking our ASP from USD26/1,000 to USD29/1,000 for both FY20 and FY21.

Reiterate OP. Correspondingly, TP is raised from RM12.60 to RM15.60 based on 36x CY21E EPS of 43.5 sen (at slightly above +2.0SD above 5-year historical forward mean). Its merits are: (i) strong management, (ii) ability to supply in the current tight market conditions, and (iii) solid earnings growth averaging 79% per annum compared to FY20E and FY21E PERs of 36x and 27x, respectively.

A key risk to our call is lower-than-expected volume sales and margin.

Source: Kenanga Research - 22 May 2020