1QFY21 PATAMI of RM2,376m (+84% QoQ; 2,000% YoY) came in at 36%/26% of our/consensus full-year forecasts. The positive variance from our forecast is due to higher-than- expected ASP. Hence, we raised our FY21E net profit by 40% to account for higher ASP. However, we maintain our TP of RM10.68 based on 11.5x CY21E raised EPS of 92.9 sen (at close to -1.0 SD below 5-year historical forward mean). We lowered our target PER as we believe that its earnings growth will moderate towards more sustainable levels beyond FY21. Despite this, there remains ample upside to our target price of RM10.68. Reiterate Outperform.

QoQ, 1QFY21 revenue rose 53% due largely to higher ASP (+53%) and a flat sales volume (+0.05%). The flattish QoQ volumes sale was due to the temporary closure of Klang Meru factories as a result of the COVID-19 EMCO. Correspondingly, PBT margin improved by 12.8ppt to 65%compared to 52.2% in 4QFY20 due to higher ASP which flowed straight down to bottom-line. This brings 1QFY21 PATAMI to RM2,376m (+84%). A 1st interim dividend of 16.5 sen (56% of pay-out which exceeds its 50% policy implying the incorporation of special dividend) was declared which came in above our expectation.

YoY, 1QFY21 revenue rose 293% due to higher volume sales (+34%) and ASP (+193%). The Group’s improved profit was also attributed to productivity enhancements which it has continued to embark on, while the Group’s utilisation levels remained at close to 100% amplified production efficiency which reaped superior economies of scale. This propelled 1QFY21 PATAMI higher by 2,000%.

Salient points from the result conference call. Management is confident of robust demand over the next two years due to continuous acute shortage and surging cases of COVID-19 in Europe and US. Case in point, US stockpile dropped from 16.9 billion pieces in December 2019 to 2 billion pieces in October 2020. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. Looking ahead into 2QFY21, we highlight that TOPGLOV’s ASP in 2QFY21 is expected to jump by 30% QoQ, with higher volumes (+10% from new capacities) and product mix skewed towards higher margin nitrile gloves. Efforts to source for more worker accommodations and to improve existing ones have been ongoing for which the Group has already invested RM70m. In addition, the Group has spent RM20m purchasing 100 units of apartments over the past two months and is also renting more houses for its workers. Over the medium term, the group has earmarked approximately RM100m to be invested in workers’ facilities and accommodation, which includes building mega hostels in Klang and Banting with a combined capacity of 7,300 pax fully equipped with a suite of amenities and facilities. So far 8,357 workers or 94% of those tested positive and recovered, or negative are ready to resume work. Presently, its Klang factories’ utilisation is slowly ramping up with the first stage re-opening of seven factories with stage two re-opening of another seven factories next week.

Raised FY21E net profit by 40% after hiking our ASP from USD55/1,000 pieces to USD70/1,000 pieces and assuming 80% utilisation or 75b pieces volume sales (taking into account of the temporary production loss in Klang factories). Our FY22E ASP assumption remains conservatively pegged at USD40/1,000 pieces.

Reiterate OP. However, we maintain our TP of RM10.68 based on 11.5x CY21E (vs. 15x previously) on raised EPS of 92.9 sen (at close to -1.0SD 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 be factored in. Its merits are: (i) resilient earnings base due to its pricing power and sheer capacity size in the industry, and (ii) solid earnings growth averaging >100% in FY21 compared to PER of 6x.

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

Source: Kenanga Research - 10 Dec 2020