As the COVID-19 outbreak continues, the management of Top Glove confirmed that demand remains strong for gloves, which are a staple within the healthcare industry. Per its report dated yesterday (13 Feb), Macquarie Equities Research (MQ Research) believes this justifies the premium valuation on Top Glove, reiterating its Outperform rating with a target price that is over 20% higher than Top Glove’s closing price yesterday.

Event

• MQ Research hosted a conference call with Top Glove management, which has confirmed that demand remains strong and that the company is seeing higher orders from other countries. Given that most of these orders are to be delivered by February/March, MQ Research expects the strong order flows to be reflected only from 3Q FY20 (March–May).

Impact

• Demand remains strong. Management has confirmed that demand for gloves remains strong, having seen other countries increase orders. Order lead times have been longer: latex gloves at 55–60 days (previously 30–40 days) and nitrile gloves at 45 days (previously 30–40 days). Currently, the company’s factories are running at an 85–88% utilisation rate. Hong Kong and China comprise only 4% of group revenue, and thus while MQ Research believes demand should rise there due to the coronavirus epidemic, the contribution might be small compared with the contribution MQ Research expects to see on an increase in demand from other markets such as the United States and Europe (North America and Europe comprise 30% and 32% of group revenue, respectively), which could provide earnings upside risk in coming quarters.
• Pricing upside potential. Management acknowledged that during periods of stronger demand, such as with H1N1, the company is typically able to remove the bulk discount, providing upside to realised average selling price (ASP). Any cost increases, eg, the recent increase in the latex raw material price (+8%), would also be fully passed on to customers. MQ Research does not believe the market is factoring realized priced upside into earnings estimates, and thus MQ Research sees upside risk that the company could beat consensus over the coming quarters.
• As shown in the table below, while epidemics can cause a spike in short-term demand, normalisation of demand thereafter is at a higher level. This provides longer-term volume upside risk.

Action and Recommendation

• MQ Research views rubber gloves as a staple within the healthcare industry, which MQ Research believes justifies the premium valuation on Top Glove. MQ Research reiterate its Outperform rating with a target price of RM7.35, which is based on +1.5SD of 32x price-earnings ratio (PER).

12-month Target Price Methodology

• TOPG MK: RM7.35 based on a PER methodology

Source: Macquarie Research - 14 Feb 2020