KEY INVESTMENT HIGHLIGHTS

• Products from two subsidiaries placed under US detention order

• Neutral on the news as issue should resolve within 2 weeks

• Muted earnings impact

• Earnings estimate maintained

• Maintain BUY with unchanged TP of RM26.12

Two subsidiaries placed under US detention order. Top Glove announced that the US Customs and Border Protection (CBP) had placed a detention order on disposable gloves manufactured by two of its subsidiaries, namely Top Glove Sdn Bhd and TG Medical Sdn Bhd on 15th

July 2020. Top Glove revealed that there is a possibility that this may be related to foreign labour issues whereby the reimbursement cost is estimated in the range of RM20m to RM50m.

Neutral on the news as issue should resolve within 2 weeks. We are neutral on the news as Top Glove are reaching out to the CBP through their office in US and engaging a third-party independent consultant to work towards a speedy resolution of the matter within an estimated 2 weeks. The shipments detained can be released once the detention order lifted. We gather that US accounts for about 25% of Top Glove’s sales volume while the two subsidiaries that have been placed under detention order accounted for 12.5% of its total sales. Meanwhile, Top Glove will continue ship stocks to the US and park at free trade zone. In a worst-case scenario, Top Glove could ship the stocks to other countries as demand for gloves is strong amid the Covid-19 pandemic.

Muted earnings impact. Earnings impact from the detention order is expected to be muted as Top Glove is confident to resolve the issue within 2 weeks. Besides, the estimated reimbursement cost of RM20m to RM50m to resolve the issue is minimal considering estimated earnings of >RM1b in FY20. Hence, we make no changes to our earnings forecast for FY20-22F.

Maintain BUY with unchanged TP of RM26.12. We maintain our TP for Top Glove at RM26.12, pegging FY21F EPS of 60.8sen at PER of 43x. We value Top Glove at its upcycle PER of +1SD 3-year historical mean PER in view of the positive outlook for gloves demand. We believe the positive earnings outlook for Top Glove is unfazed by the detention order as demand for gloves remains strong with average selling price of gloves remains on uptrend. Hence, we maintain our BUY call on Top Glove

Source: MIDF Research - 17 Jul 2020