KEY INVESTMENT HIGHLIGHTS

• Earnings surprised on the upside

• 4QFY20 net profit grew 271.4%qoq and 1,648.9%yoy

• Better quarters ahead as ASPs are still on the uptrend

• High cash level bodes well for expansion plan

• FY21F/FY22F earnings revised by +322.1% and +160.3%

• Maintain BUY with a revised TP of RM9.63

Earnings surprised on the upside. Top Glove’s full year net profit of RM1.9b beat ours and consensus’ estimates at 162.9% and 122.4% respectively. This comes on the back of much better margins driven by higher utilisation rate and better efficiency. Notably, PATAMI margin improved by 20.9ppt qoq and 35.3ppt yoy to 41.6%. A final dividend of 8.5 sen was announced, bringing full year DPS to 11.83 sen.

4QFY20 net profit spiked by 271.4%qoq and 1,648.9%yoy to RM1.3b, riding on revenue that surged 84.2%qoq and 161.5%yoy to RM3.1b. The vast improvement in its top and bottomline can be attributed to the shortage in supply for gloves globally amid the Covid- 19 pandemic, which pushed up average selling prices. On the other hand, Top Glove has also been increasing production capacity aggressively to the tune of 6 new lines per month. The additional volume is able to help it further scale up efficiently cost and operations wise, which trickles down to its profitability.

Better quarters ahead as ASPs are still on the uptrend. Lead time for orders has surged to 400 days from 40 days and average selling prices (ASPs) are still trending upwards until end of the year. Meanwhile, monthly orderbook jumped by 150% compared to pre-pandemic level. ASPs are also expected to remain elevated considering the overwhelming global demand, which has not been met by the new capacity contributed by the major producers in Malaysia, Thailand and China. The company estimates that demand for gloves will grow by 20% in 2020, 25% in 2021 and 15% after the pandemic. The shortage of NBR, which has led to increase in prices, is expected to keep ASPs high as well. The limited supply in raw material could also become a barrier of entry for new and small entrants. These factors are expected to keep ASPs high at least until 1HCY21. The 30% allocation for spot orders will continue to contribute to blended ASPs and profitability.

Product and geographical diversification to cushion possible business risks. Top Glove’s product mix has enabled it to fulfil different requirements from its various customers. Due to the limited supply of NBR and long lead time for nitrile gloves (nitrile gloves spot order had been fully taken up for the next three months), some customers has decided to switch to powder-free natural rubber gloves as well as TPE gloves. The discount between natural rubber gloves and nitrile gloves are expected to narrow going forward should more customers choose to buy natural rubber gloves. On the other hand, price of natural rubber has remained fairly stable. Its vinyl glove segment, which is mainly catered for the China market, has also seen huge increase in ASP. Management guided that production activities are going well at its Vietnam plant, with new production lines coming in monthly. We also think that Top Glove’s wide geographical presence enables it to sell to various markets as the number of active cases globally may experience different urgency in demand along the way.

High cash level bodes well for expansion plan and brings down financial costs. The company has utilised the deposits from orders to fully pay off its syndicated loans amounting to RM654.0m. It has also converted 87% of its convertible bonds of RM710.0m to ordinary shares. Its net cash of RM2.3b as of end-Aug enables it to fund its expansion plans and for dividend payout. Out of the cashpile, it has earmarked RM1.9b for capex, which includes 13 double former lines and 3 single former lines for CY2020 and 56 double former lines in CY2021. Both of which will add another 19 billion pieces of gloves to its capacity. Further down the horizon, the company allocates RM8b in capex for the next 6 years. During the quarter, operating cashflow improved by a whopping 500% to RM3.2b.

FY21F/FY22F earnings revised by +322.1% and +160.3% as we assume higher volume, selling prices and profitability. Although FY20 is a record year, we think that there is a good chance that FY21F top and bottom lines are likely to top that.

Maintain BUY with a revised TP of RM9.63 (previously RM9.31). Our adjusted TP is based on PER of 38.0x pegged to FY22F EPS of 25.3 sen. Our PER valuation of 38.0x is based on +1 SD of its 10-year mean, which we think better portrays its long-term prospects and vast improvement in the near-term outlook. We also think the premium is justified for its leading position, market share and business upcycle. We think that demand for gloves are likely to remain strong in the coming quarters due to unabated number of active cases and higher hygiene awareness. We also like Top Glove for its product and geographical diversification, which allows it to mitigate any potential business risks in any particular market or product segment. As such, we keep our BUY recommendation. Risks to our call include plunge in ASP and overcapacity of production in gloves.

Source: MIDF Research - 18 Sept 2020