A Supernormal Year; Remains Our Top Pick

• Top Glove's upcoming 2QFY20 results could be better q-o-q/y-o-y. Earnings could be even stronger in 2HFY20, driven by the COVID 19-led demand and margin expansion on tight supply situation.
• We raise our FY20E EPS by 9% and maintain FY21-22E. Our Target Price is raised to MYR6.65 (+18%) on a higher CY21 P/E target of 34x (from 31x), being its +1.5 SD to 5-year mean.
• Top Glove deserves to trade at +1.5 SD to mean because of its robust near-term earnings growth and defensive appeal.
• Maintain BUY.

2QFY20E: Better Q-o-q and Y-o-y

• Top Glove's 2QFY20 results is scheduled to be released on 19th Mar. We expect net profit to be better q-o-q/y-o-y (1QFY20: MYR111m, 2QFY19: MYR106m) on:
  1. volume growth of 5-8% q-o-q on capacity growth of 10%;
  2. stable margins as latex glove ASP was raised to offset the higher latex cost (+5% q-o-q) and minimum wage hike (+9% in Jan 2020).
• Meanwhile, nitrile glove ASP was stable as the lower NBR cost offset the minimum wage hike.

2HFY20E: Stronger Sales and Margin Expansion

• Top Glove’s sales orders have doubled in the past 4 weeks. However, due to the worker constraint, we expect the sales volume to grow at a more moderate pace of 5-10% q-o-q in 3QFY20. Its plant utilisation rate rose to 90% (from 85% in 2QFY20) and the sales lead time has extended to 60 days (from 30-40 days).
• For 4QFY20, its sales volume may grow another 5-10% q-o-q with the commencement of the new lines at F2B and F5A (+5% to total capacity by mid-2020). We also expect its margins to expand in 2HFY20 given the tight supply and higher plant utilisation rate.

Raise FY20E EPS by 9%, Maintain FY21-22E

• Our FY20E EPS is raised by 9% as we nudged up our ASP by 2%. We project a supernormal EPS growth of 33% for FY20E and to contract by 1% in FY21E.
• Though glove demand may fall when COVID-19 subsides, we think some of the new demand created by COVID-19 may stay. Developing countries, which have low rubber gloves penetration rates (e.g. China), may raise the regulatory standards for the gloves used at the hospitals/clinics, potentially resulting in rubber gloves displacing vinyl.

Strong Glove Demand Globally

• In the past 4 weeks, Top Glove’s sales orders doubled and the additional orders were from almost all of its existing customers - China/HK, Singapore and Italy accounted for 20%, 8% and 6% of the additional orders. The strong demand is driven by COVID-19 and production disruption at China.
• We also understand that the initial demand from China was mostly for the latex gloves (potentially due the lower price) and subsequently spilled over to nitrile gloves due to the tight latex gloves supply presently.
• However, we caution that Top Glove’s sales volume would grow at a more moderate pace of 5-10% q-o-q in 3QFY20 (slower than the sales orders). This is because the production is constrained by the shortage of workers and capacity.
• Presently, Top Glove’s plants are running at a higher average utilisation rate of 90% (from 85% in 2QFY20) and the sales lead time has lengthened to 60 days (from 30-40 days), implying strong sales in 3QFY20.
• For 4QFY20, we think its sales volume may grow another 5-10% q-o-q with the commercialisation of the new lines at F2B and F5A in Mar 2020. Upon the full commercialisation by mid-2020, Top Glove’s capacity would grow by 5%.
• Given the tight supply environment and higher plant utilisation rate, we also expect Top Glove’s margins to expand in 2HFY20.
• In our earnings model, we have assumed for:
  1. sales volume growth of 11%/8%/8% in FY20-22E;
  2. EBITDA margin of 16%/15%/15% in FY20-22E; and
  3. USD against MYR of 4.15 in FY20-22E.

Source: Maybank Research - 5 Mar 2020