FY20 PATAMI of RM1,867m (+412% YoY) beat our/consensus full-year forecasts by 33%/22%. The variance from our forecast is due to higher-than-expected ASP. Hence, we raised our FY21E net profit by 66%, to account for higher ASP. However, we maintain our TP of RM10.68 based on 15x CY21E raised EPS of 71.1 sen (at -0.5SD below 5-year historical forward mean). We lowered our target PER rating to -0.5SD below 5-year mean (compared to above mean previously) as we believe that as earnings growth moderate towards more sustainable levels beyond FY21, the previously applied premium-over-mean valuation is no longer valid. Despite this, there remains ample upside to our target price of RM10.68. Reiterate Outperform.

QoQ, 4QFY20 revenue rose 84% due to higher sales volume (+5%) and ASP (+78%). Correspondingly, PBT margin improved by a massive 27.2ppt to 52.2% compared to 25% in 3QFY20 due to higher ASP which flowed straight down to bottom-line as well as gains from greater efficiency and economies of scale. This brings 4QFY20 PATAMI to RM1292m (+271%). A final dividend of 8.5 sen was proposed bringing FY20 DPS to 11.8 which came in above our expectation. 

YoY, FY20 revenue rose 51% due to higher volume sales (+17%) and ASP (+27%). The Group’s improved profit was also attributed to productivity enhancements which it has continued to embark on, while the Group’s utilisation levels which remained at close to 100% amplified production efficiency and reaped superior economies of scale. High utilisation helped spread overheads over significantly scaled up production, thereby lowering per unit costs, notably that of labour and natural gas. This propelled FY20 PATAMI higher by 412% to RM1,867m.

Strong prospects in subsequent quarters. We highlight that TOPGLOV’s ASP for months of Sept/Oct/Nov is higher by 30%/30%/15% m-o-m further indicating supply tightness. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially above-average industry prices. The Group’s monthly order-book has seen a significant rise of about 150% from pre-COVID days while lead time (delivery) has gone up from about 40 days to as high as about 400 days presently. Management is optimistic on the outlook ahead and reiterated that the glove industry’s prospect remains promising. The earnings visibility looks reasonably good for FY21 based on lengthened demand lead times and ASP momentum. Although clarity diminishes from FY22 onwards, we are sold on the point that rubber glove makers are benefitting immensely from increased demand that is sustainable - a step up change that is structural out of heightened hygiene awareness that extends beyond the healthcare community. On this point alone, we note that there is upside risk to our earnings projection for FY22, as we reflect conservative assumptions of firstly, that ASP would normalise from USD55/1000 pieces to USD40 (on easing of supply bottlenecks) and secondly, lagging costs of production which hitherto been fairly contained would likely catch up, namely labour and raw materials.

Raised FY21E net profit by 66% after hiking our ASP from USD40/1,000 pieces to USD55/1,000 pieces. Our FY22E ASP assumption remains conservatively pegged at USD40/1,000 pieces, mindful that prices have likely shifted towards a newly raised normal that are beyond pre-Covid levels.

Reiterate OP. However, we maintain our TP of RM10.68 based on 15x CY21E raised EPS of 71.1 sen (vs 21x previously) (at -0.5SD below 5-year historical forward mean). We lowered our PER rating as we believe valuations are already pegged to supernormal earnings; hence, moderation in earnings momentum beyond this phase should have been factored in. Its merits are: (i) a strong management, (ii) resilient earnings base due to its pricing power and sheer capacity size in the industry, and (iii) solid earnings growth averaging >100% in FY21 compared to PER of 10x.

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

Source: Kenanga Research - 18 Sept 2020