Top Glove's 3QFY21 Results Below Our Expectation; Lower Target Price

• Top Glove's 3QFY21 earnings came in below our expectation but in line with consensus. ASP seemed to have peaked in Feb 2021 and started falling 16% q-o-q in 3QFY21 (2QFY21: +27% q-o-q) while lead time has reduced to 90-120 days.
• We adjust our earnings per share forecasts by -2% to -26% after we lower our ASP assumptions by -2% to -8%, partially cushioned by a lower number of shares (-39%) to be issued for its Hong Kong listing. Post-earnings adjustments, our new DCF-Target price for Top Glove is MYR4.51. HOLD.

Profit Fell Short

• Top Glove's 3QFY21 net profit of MYR2.0b (-29% q-o-q, +4.9x y-o-y) brought 9MFY21 core net profit to MYR7.4b (+12x y-o-y), making up 66%/73% of our and consensus full-year estimates. A 3rd single tier dividend of RM0.18 was declared (YTD: RM0.597), translating into 71% dividend payout ratio.

Lower Sales Volume, ASP But Higher Costs

• Top Glove's 3QFY21 revenue declined by -22% q-o-q on lower sales volume (-4% q-o-q, - 9% y-o-y) due to the USA’s ban and seizure of its rubber gloves as well as lower blended ASP of US$68/k pcs (-16% q-o-q). Earnings were also hit by higher raw material costs (NBR: +0.4% q-o-q, latex: +8% q-o-q) that had led to a -6.5ppt q-o-q decline in 3QFY21 EBITDA margin to 64%.

Earnings Adjustments

• Top Glove expects sales volume to pick up by 10~15% in 4QFY21 once the US Customs and Border Protection (US CBP) lifts its withhold release order (WRO) against Top Glove’s products while ASP may weaken further in the coming months on rising competition.
• We lower our earnings forecasts for Top Glove to factor in:
  1. lower blended ASP -2.3%/-3.4%/-7.7% to US$73/47/33 for number of shares of 793.5m (-39%) to be issued for its Hong Kong (HKG) listing. No timeline on the HKG listing was given for now.

Hopeful That the Withhold Release Order Will be Lifted Soon

• Top Glove has again reaffirmed that independent international UK sales volume to the US declined -68% q-o-q in 3QFY21, partially cushioned by rising demand from developing countries.

Risk Statement

• There are several risk factors to our earnings estimates, target price and rating for Top Glove. Abrupt changes in the momentum of input costs (i.e. latex, NBR) and intense competition may lead to lower earnings for Top Glove. Additionally, sharp appreciation of MYR against US$ will also negatively affect its earnings, for almost the entire Group’s revenue is derived in US$.

Source: Maybank Kim Eng Research - 10 Jun 2021