• Operating at high utilisation rate driven by robust demand.
• Industry shortage has led to uptrend in pricing.
• Raise Top Glove's net profit forecasts on higher ASP assumptions.
• BUY with higher Target Price of RM18.45 on strong earnings growth.

Stronger Product Pricing on Shortage

• The robust demand for gloves is leading to industry shortage and average selling price (ASP) increases. We understand that utilisation rate is running at more than 90% and order backlog has extended to one year. We raise our FY20-22F net profit forecasts for Top Glove by 96-133% to factor in higher product price assumptions.
• We expect the higher ASPs to be reflected in sequentially stronger 3QFY20 profit. 2H20 should see a significant step up in sales volume and margins compared to 1H20.
• Upgrade Top Glove to BUY in view of the strong earnings outlook.

Uptrend in ASP Expectations

• We gather ASP increased about 5%-10% m-o-m in March-May and about 15% in June-July due to strong demand. Currently, the market is facing a shortage of gloves due to COVID-19 and order backlog has increased from four months to one year.
• Overall, ASP in 2HFY20 is expected to be higher than 1HFY20. With the anticipation of a continuous increase in ASP, we have adjusted our FY20 ASP growth assumption upwards to 11% y-o-y.
• Profit margin is expected to be better at 16.6% for FY20 compared to 7.9% in FY19 and 9.3% in 1HFY20 on the back of strong volume growth and higher ASPs.
• Our net profit assumption for FY20-FY22F is adjusted upwards by 96%, 133% and 129% respectively as we factor in higher product price assumptions.

BUY With Higher Target Price of RM18.45

• We raise our target price to RM18.45, based on PE of 39x CY21F earnings. This is based on +2 SD of its 5-year mean. TOPG is trading at 33x forward PE or close to +1.3 SD of its 5-year mean PE.
• Upgrade Top Glove from HOLD to BUY in view of its strong earnings outlook.

Where We Differ

• Our FY20/21F net profit forecasts are 32%/28% higher than consensus as we have factored in higher sales volume and ASP due to the robust demand arising from the COVID-19 outbreak.

Potential Catalysts

• Stronger-than-expected ASP and sales volume will further drive the company’s earnings and share price. Every 1% improvement in net margin could boost TOPG’s net profit by 7.4%. A second wave of COVID-19 infections after the gradual easing of lockdowns could see glove demand sustained at high levels.
• In the long term, even as infection rates ease, we expect COVID-19 to drive increased usage of gloves globally, sustaining a “new normal” of demand.

Source: DBS Research - 4 Jun 2020