The stock is down 15% despite the stellar 3QFY20 results, announced a week ago. We believe the confluence of reasons weighing down on the share price for the past few days including alleged ill treatment towards foreign workers, fears of oversupply and rumours of windfall tax have been largely overplayed. The stock is currently trading at undemanding PER valuation of slightly above mean at 21x compared to earnings growth averaging 130% for FY20 and FY21. TP is RM25.00 based on unchanged 36x CY21E EPS. Reiterate Outperform.

Unwarranted 15% decline over the past few days. The stock is down 15% despite the stellar 3QFY20 results announced a week ago. We believe the confluence of reasons weighing down on the share price these past few days such as rumours of windfall tax, ill treatment towards migrant workers and fears of oversupply have been largely overplayed. The issue concerning migrant workers is old news which had been resolved. Previous concerns such as confiscated passports, overdue agent fees and overtime wages have all been addressed. TOPGLOV had since 2019 adhered to international social compliance standards and have over 100 external international standards audit for all its factories. Furthermore, although the issue of windfall tax has been talked about, of which we were not able to verify its veracity, it is pending an official announcement, if any.

Our analysis suggests acute shortage in supply. We have done an analysis to quash any concerns of oversupply. In anticipation of higher demand due to the pandemic, stock piling and new users following the pandemic, players are raising capacities to meet the surging demand. Our analysis (see table overleaf) suggests that acute supply and supernormal demand could persist over the next two years. Interestingly, players are getting orders for new users that include airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a concern. In fact, the estimated new yearly capacity may not actually start as scheduled and hence the supply shortage will continue to be acute in 2021. Typically, to cater for normal demand, glove makers essentially need to build just one plant per year. However, from channel checks, to cater for this current pandemic-driven demand, two to three plants are required for each glove maker (on average) annually in order to meet the supernormal demand, which take between 12 to 24 months to complete. Hence, we conclude that ASP tightness will continue going into 2021. We highlight that rumours of a player in China ramping up capacity by 30b pieces over 2-3 years appears absurd which typically takes 8 to 10 years to build.

Strong prospects ahead. We highlight that TOPGLOV’s ASP for months of June to Aug is higher by 15% m-o-m further indicating supply tightness. 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

Reiterate OP. TP is RM25.00 based on unchanged 36x CY21E 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 for FY20 and FY21 compared to PERs of 32x and 21x, respectively.

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

Source: Kenanga Research - 19 Jun 2020