1HFY21 PATAMI of RM5226m (+22-fold YoY) came in above expectations at 56%/52% of our/consensus full-year forecasts. The positive variance from our forecast is due to higher-than-expected ASP. Hence, we raised FY21E/FY22E net profit by 17%/17% to account for higher ASP/volume growth. The group has guided that nitrile ASP is expected to gradually decline by 3-5% m-o-m which came in earlier-than our expectation but does not expect a sharp drop as demand remains robust, in line with industry post-COVID growth rate of 15-20%. Due to the latest forward ASP guidance amidst diminishing sentiment on the sector, we trim our TP from RM8.50 to RM6.80 based on 13x CY22E EPS. Reiterate Outperform.

QoQ, 2QFY21 revenue rose 13% due largely to higher ASP (+24%) which overwhelmed lower sales volume (-8%). The lower QoQ sales volume was due to the temporary closure of its Klang Meru factories as a result of a COVID-19 EMCO. This brings 2QFY21 PATAMI to RM2,869m (+22%). A 2nd interim dividend of 25.2 sen was declared, bringing 1HFY21 DPS to 41.7 sen, in line with our expectation.

YoY, 1HFY21 revenue rose 315% due to higher volume sales (+26%) and ASP (+237%). 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 close to 100% as amplified production efficiency reaped superior economies of scale. This propelled 1HFY21 PATAMI higher by 22-fold.

Salient points from the results’ conference call. The just announced results of TOPGLOV suggest that the ASP trend is expected to soften albeit at a slower pace on the back of still robust demand. Specifically, nitrile ASP is expected to decline 3-5% m-o-m or adjusted down to be in line with peers. Management is of the view that ASP is unlikely to fall off the cliff despite average lead time being reduced from 300 days in early Jan 2021 to 170 days currently compared to 20-30 days pre-COVID-19. The lower lead time could be attributed to the additional capacity of TOPGLOV following a gradual ramp up of capacity in 1H 2021. Looking ahead into 2HFY21, the group highlight that ASP is expected to be higher in 2HFY21 compared to 1HFY21. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. Although sentiment on the sector is diminishing, lead times suggest that CY22 demand will remain strong, from increased demand brought by heightened hygiene awareness extending beyond the healthcare community. According to Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will last beyond 1Q 2022 with growth rate averaging between 15% and 20% going forward with still high lead time averaging six to eight months. Plans for a dual primary listing in which it will issue 1.5b new shares via a global offering on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX) is expected to enlarge share base by 16%. The listing is expected to be completed in end 2Q 2021.

Raised FY21E net profit by 17% as we raise our ASP assumption from USD70/1,000 pieces to USD76/1,000 pieces. Our FY22E ASP assumption remains pegged at USD40/1,000 pieces. However, we raise our FY22E net profit by 17% as we raise our volume growth assumption from 6% to 11%.

Reiterate OP. Due to the latest forward ASP guidance amidst diminishing sentiment on the sector, we downgrade our TP from RM8.50 to RM6.80 based on 13x CY22E EPS of 52.4 sen (at close to -1.0SD below 5-year forward historical mean) as we roll over our valuation base from CY21 to CY22. Our target PER is at a 30% discount to normalised 5-year pre-COVID historical forward mean averaging 16-18x. In our view, from the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players which commands 65-68% of global market share which have consistently evolve and innovate in terms of products and plant modernization via automation. Assuming that the HKEX listing is completed, our indicative theoretical TP could be at RM5.80 (based on enlarged share base of 9.7b units)

A key downside risk to our call is lower-than-expected ASP in 2H 2021.

Source: Kenanga Research - 10 Mar 2021