KEY INVESTMENT HIGHLIGHTS

• Production affected by closure of factories

• Reduced capacity may dampen earnings but ASP uptrend may offset the temporary hurdle

• Earnings estimates maintained for now

• Maintain BUY with an unchanged TP of RM10.96

Production affected by closure of factories. Operations at Top Glove’s 28 factories in Meru, Klang have been affected by the surge in number of Covid-19 cases there. It was reported that the number of infections linked to Top Glove’s employees amounted to 1,067 new cases yesterday. About 5,800 individuals in the cluster had been screened with 1,330 testing negative for the virus and another 1,913 are awaiting results. Top Glove announced that production at 16 of its factories had been halted since 18th of November while 12 factories had been operating at much reduced capacities. We estimate that this may negatively impact the group’s production capacity by 50%.

Reduced capacity may dampen earnings but ASP uptrend may offset the temporary hurdle. Based on our estimates, the reduction in production capacity due to the factories closure for a two-week period could result in a 4% drop in net income for FY21E assuming average selling prices remain the same. If operations are affected by up to a month, net income may be hurt by 8%. On the flipside, higher average selling prices (ASP) may partially cushion the temporary blip. We understand that the pace of ASPs increase is circa 10% month-on-month until January 2021.

Earnings estimates maintained for now. We understand that the development of the temporary closure of its facilities in stages is still fluid. As such, the actual impact to Top Glove’s full year earnings may be hard to ascertain at this point. The development has not affected its orders thus far. Hence, we keep our FY21E estimates for the time being.

Maintain BUY with an unchanged TP of RM10.96. While we acknowledge that this event may cast negative sentiment on the company with a possibility of negative impact to its earnings, we note that the situation may create a more severe shortage in rubber glove supply, which may in turn drive prices even higher. Our TP is derived from FY22F EPS of 42.8 sen pegged to its long-term average of 25x, which is also similar to the level prior to the pandemic. At current price, PER for FY21E is estimated at 7.7x and FY22F at 16.8x, which is deemed attractive. Thus, we are keeping our BUY recommendation. Dividend yield is estimated at 3.0%.

Source: MIDF Research - 24 Nov 2020