Raising Top Glove's Earnings Forecasts; Our Top Pick

• For Nov 2020, Top Glove’s nitrile glove ASP would be 4.1x that of Feb 2020’s level and we understand that there is still another 30-50% upside. Additionally, the ASP hike for latex powder free gloves has reaccelerated for Nov 2020 and there is still room to raise the ASP further.
• We raise FY20/21/22E EPS by 6%/63%/224% on higher ASPs, but retain our Target Price at MYR9.53 (ex-bonus) on a lower CY21E P/E target of 9x, about -1SD of 5Y mean (vs. 16x), on consideration for earnings to taper post CY21E.
• Maintain BUY.

Nitrile Gloves: Going for the Highest Possible ASP

• For Nov 2020, we understand the ASP hike for nitrile gloves is +15% m-o-m, bringing ASP of nitrile gloves to 4.1x that of Feb 2020 (pre-COVID 19). We note that Sri Trang Agro-Industry (SGX:NC2)’s nitrile ASP is on par to that of Top Glove. As for Hartalega and Kossan, their ASPs are 3-6 months behind but both are expected to raise ASPs to narrow the gap.
• Presently, Top Glove’s spot selling price is USD130-150/k pieces (+37-58% higher than the normal orders) and it may raise its ASP to this level in the near-term.
• We also note that some of its customers are willing to lock in their next 12 months orders at Nov’s high ASP level, signalling that even customers are expecting the ASP to stay elevated in the next 12 months.

Latex Powder Free Gloves: ASP Hike Reaccelerating

• ASP hike for latex powder free gloves has reaccelerated for Nov to +10% m-o-m (Oct: +5% m-o-m) due to the strong demand. Some customers have shifted their orders to latex powder free gloves as the sales lead time of 15 months is shorter than nitrile glove’s 19 months.
• We note that Sri Trang Agro-Industry’s latex powder free glove ASP is 15% higher than that of Top Glove. Hence, there is still room for Top Glove to raise its ASP further.

Special Dividend in FY21E?

• Top Glove's 4QFY20 (Jun-Aug) results are scheduled to be released on 17 Sep. For 4QFY20, we project a net profit of MYR1.05b based on our blended ASP estimate of USD37/k pieces (+63% q-o-q), sales volume estimate of 19.1b pcs (+12% q-o-q) and operating cost increase forecast of 28% q-o-q.
• We do not expect a special dividend for FY20E, but see the possibility of a special dividend in FY21E given the supernormal earnings. Our model assumes zero special dividend in FY20-22E with an implied dividend yield of 9% for FY21E.

Source: Maybank Kim Eng Research - 14 Sep 2020