9MFY21 Core PATAMI of RM2,710m (+5-fold YoY) came in below expectations at 81%/86% of our/consensus full-year forecasts in anticipation of lower ASP in 4Q21. The negative variance from our forecast is due to lower-than-expected volume sales. As such, we lower our FY21E net profit by 8% as we factor in lower utilisation rate to 83% from 90% into our earnings model. Our FY22E ASP assumption remains at USD28/1,000 pieces. Our TP is RM2.45 based on 12x FY22E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 17x). Reiterate MP.

Key results’ highlights. QoQ, 3QFY21 revenue fell 42% due to lower volume sales (-25% to -30%) and ASP (-15% to -20%) from rubber gloves. The lower volume sales was impacted by the Enhanced Movement Control Order (EMCO) imposed in the state of Selangor as well as by the subsequent National Recovery Plan (NRP) where affected plants were only allowed to operate at 60% of workforce capacity. This brings 3QFY21 core net profit to RM528m (-52%). A 3rd interim DPS of 12.0 sen was declared bringing 9MFY21 DPS to 36.0 sen which came inline with our expectation.

YoY, 9MFY21 revenue rose 144% due to higher contribution from glove division (+156%), underpinned by higher ASP (+200%) more than offset lower volume sales (-8%). This elevated 9MFY21 core net profit to RM2,710m (+5-fold).

Outlook. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. From Top Glove’s 4QFY21 results briefing recently, we gathered that its ASPs have dropped faster than expected at 31% QoQ to USD48/1,000 pieces. We believe this signals acceleration in overall market ASP normalization. We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre-COVID pricing considering that the cost structure has risen amongst others including social compliance costs and the high nitrile feedstock cost compared to pre-COVID era. In the meantime, the planned capacity expansion over the next two years are as follows:- (i) Plant 20 located adjacent to Plants 18 and 19 with 1.5b pieces capacity which is expected to come be fully commissioned by 4Q21, (ii) a land in Meru located adjacent to one of its current plants is earmarked for a single plant with 5b pieces capacity to be completed in two phases i.e. Phase 1 – 6 lines, 2b pieces commencing in 2H 2021 and Phase 2 – 10 lines, 3b pieces commencing in 1H 2022, and (iii) 12 lines with 4b pieces capacity to fully commission in 2HCY22 in Bidor. Upon completion, these three new plants will bring the group’s total installed capacity from 32b to 42.4b (+33%) pieces of gloves per annum.

Lowered our FY21E net profit by 8% as we factor in lower utilisation rate to 83% from 90% into our earnings model. Our FY22E ASP assumption remains at USD28/1,000 pieces.

Maintain MP. Our TP is RM2.45 based on 12x FY22E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 17x). Since ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped.

Key risks to our call include: (i) ASP falling steeper and sooner than expected and (ii) faster-than-expected vaccine roll-outs.

Source: Kenanga Research - 22 Oct 2021