9MFY20 PATAMI of RM575m (+98% YoY) came in above expectations at 58%/63% of our/consensus full-year forecasts. The result is deemed above our expectation. The variance from our forecast is due to higher-than-expected margins. Hence, we raised our FY20E/FY21E net profit by 22%/30%, to account for higher margins. TP is raised from RM20.10 to RM25.00 based on unchanged 36x CY21E revised EPS. Reiterate Outperform.

QoQ, 3QFY20 revenue rose 37% due to higher sales volume (+25%) and ASP (+5%). Correspondingly, PBT margin improved by a massive 14.4ppt to 25% compared to 10.6% in 2QFY20 due to higher ASP which theoretically flow straight down to bottom-line as well as gains from greater efficiency and economies of scale. This brings 3QFY20 PATAMI to RM348m (+200%). A 1st interim DPS of 10.0 sen was announced which came in above our expectation.

YoY, 9MFY20 revenue rose 14% due to higher volume sales (+45%) and ASP (+3%). Utilisation shot up from 85% to >95%. Interestingly, Aspion’s capacity was also instrumental in enabling Top Glove to meet the intensified demand driven by revenue (+48%) bringing 9MFY20 net profit which grew four-fold to RM47m, as the Group’s concentrated efforts to improve efficiency, quality and profitability bore fruit. This propelled 9MFY20 PATAMI higher by 98% to RM575m.

Monthly sales remained tight, net cash position restored. Monthly sales orders went up by some 180%, resulting in long lead times, which went up from 40 days to around 400 days, with orders placed now to be delivered only over a year later. As at 31 May 2020, the group entered into a net cash position of RM279m compared with net borrowings in 2QFY20 which enabled the Group to internally fund capex requirements. We highlight that TOPGLOV’s ASP for months of June to Aug is higher by 15% m-o-m further indicating supply tightness that have further propelled ASP higher. In the 3QFY20 results teleconference, management highlighted that 20% of new capacity will be allocated to spot price which is between USD80 to USD100/1,000 pieces. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry average prices.

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/FY21E net profit by 22%/30% after raising our FY20/FY21 EBITDA margin assumption from 23%/26%% to 27%/32%.

Reiterate OP. Correspondingly, TP is raised from RM20.10 RM25.00 based on unchanged 36x CY21E revised EPS of 69.20 sen (at slightly above +2.0SD above 5-year historical forward mean). Its merits are: (i) strong management, (ii) the booming gloves market due to the pandemic, and (iii) solid earnings growth averaging 130% per annum compared to FY20E and FY21E PERs of 37x and 24x, respectively.

A key downside risk to our call is lower-than-expected ASP.

Source: Kenanga Research - 12 Jun 2020