Glove demand remains robust, with Macquarie Equities Research (MQ Research) expecting the demand to be sustained into 2021, which should support a higher average selling price (ASP) and delivery of strong earnings by glove maker Top Glove Corporation (TOPGLOV). In a report today (3 Jul), MQ Research reiterates Outperform on TOPGLOV, raising its target price to RM30.40, 73.7% above the current share price.

Read on for More.

Event

• MQ Research is reiterating its Outperform (OP) rating on the shares of TOPGLOV and raising its target price to RM30.40, based on a lower target price-earnings (PE) of 23x (was RM20.50 on a target PE of 40x). In MQ Research’s view, the market is underestimating glove makers’ abilities to raise ASPs, and, hence, the potential ASP upside has not been fully priced in. MQ Research’s FY21E profit after tax (PAT) is 108% above consensus’.

Impact

• Spot order enquiries on the rise. Management has indicated that enquiries for spot orders from the United States and Europe are on the rise due to the second wave of COVID-19. As such, the company is looking to raise the spot order allocation to more than 20% (vs last two weeks’ guidance of 20%). In MQ Research’s assumptions, it is projecting Top Glove will gradually increase its spot order allocation to 30% from 20% through 2Q FY21E (February 2021).
• ASP rise higher than expected. Management has indicated that overall lead time has increased to nearly 15 months from 13–14 months two weeks ago, and the company is seeing higher conversion orders. This should provide Top Glove the power to raise its ASP. The company now plans to increase the ASP for August order deliveries higher than initial guidance of 15%. As such, MQ Research is increasing its FY20E/FY21E/FY22E ASP assumptions 3%/57%/4% to factor in both higher ASP increases and spot order allocation.
• Lowering target PE on supernormal FY21E earnings. Based on the aforementioned strategy, MQ Research is projecting that FY21E’s net profit will be triple FY20E net profit. Given MQ Research’s belief that FY21E will be the peak of strong earnings that are unlikely to be repeated in following years, MQ Research is lowering its target price-earnings ratio (PER) to 23x (+0.5 SD) from 40x. To cross check the long-term fair value of the stock, MQ Research uses a discounted cash flow (DCF) methodology to derive a fair value of RM18.70, which translates to 10x FY21E/56x FY22E PERs. MQ Research views gloves as a staple within the healthcare industry and that the shares should trade at a premium multiple long term.

Earnings and Target Price Revision

• MQ Research is raising its FY20E/FY21E/FY22E EPS 10%/188%/20% to reflect higher monthly sequential ASP increases and higher spot order allocations. MQ Research is also raising its target price to RM30.40 from RM20.50. MQ Research’s bear-case valuation is RM11.80.

Price Catalyst

• 12-month price target: RM30.40 based on a PER methodology.
• Catalyst: quarterly earnings and consensus upgrades.

Action and Recommendation

• MQ Research is reiterating its OP rating with a higher target price of RM30.40, which is based on a lower PER of 23x.

12-month Target Price Methodology

• TOPG MK: RM30.40 based on a PER methodology

Source: Macquarie Research - 3 Jul 2020