KEY INVESTMENT HIGHLIGHTS

• Earnings exceeded expectation accompanied by 56% dividend payout

• 1QFY21 net profit increased by 96.8%qoq to RM2.4b

• Higher ASPs, recovery in production capacity and sales mix to drive growth.

• Long lead time and climbing ASP underpinned by robust demand

• Maintain BUY with an unchanged TP of RM10.96

Earnings exceeded our expectation, making up 30.6% of our full year estimates. However, it was largely within consensus’ estimates at 27.6%. Top Glove’s latest results was stellar despite some recent setbacks in its operations as a result of the Covid-19 cluster linked to its workers. The company announced an additional 6% in dividend payout as special dividend on top of its policy of 50% payout. This brings DPS for the quarter to 16.5sen, which is above our expectation. Hence, we increase our DPS assumption to 55.0sen for FY21E from 48.0sen previously.

1QFY21 net profit increased by +96.8%qoq to RM2.4b premised on sales that jumped by +53.1%qoq to RM4.8b. This was despite production volume that declined marginally qoq by 0.5% due to the closure of its 28 factories in Meru, Klang for two weeks during the quarter. The increase in top and bottomline was attributable to sequential nitrile glove ASP (average selling prices) growth of +76% and natural rubber gloves that went up by +48%qoq. It was slightly offset by NBR prices that rose +40.0%qoq and natural rubber latex that climbed +13.0%qoq. The net profit recorded has also included the RM195m donation it had pledged to fight the pandemic.

1QFY21 net profit grew 20 times to RM2.4b compared to a year ago due to revenue that surged by +293.6%yoy to RM4.8b. Net profit margin increased by 40.7ppt compared to a year ago due to improved production effeciency and spike in average selling prices (ASPs) due to the acute shortage in supply. Updating on Aspion, management expects its investment cost of RM1.1b to be fully paid back in FY21.

Higher ASPs, recovery in production capacity and sales mix to drive growth. Looking ahead, ASP is expected to increase by about +30%qoq in 2QFY21. Its 4,636 employees, representing 90% of the 5,147 employees, who were previously tested positive for Covid-19 have been certified fit to work. All in, the company has tested 8,868 employees, out of which, 94% are ready to resume work after the quarantine period. Production of the 28 closed factories are expected to recover in stages starting this week (starting with 7 factories first) and is expected to be fully recovered in the next two to three weeks. On top of that, it is adding another 10% capacity to its production for the quarter. It will also increase its nitrile glove production as it was able to secure sufficient nitrile rubber for its production.

Long lead time underpinned by robust demand. Delivery time for nitrile gloves are at 510 days (620 days in 4QFY20), natural rubber gloves at 340 days (400 days in 4QFY20), surgical gloves at 260 days (250 days in 4QFY20) and vinyl gloves at 170 days (110 days in 4QFY20). The change in lead time are due to the shift in product mix as well as replenishment of nitrile rubber, which enable to the company to increase their production in nitrile gloves. Meanwhile, its spot orders, which makes up 30% of overall production, takes about three months to deliver.

Developing market volume increased by +47.0%yoy (vs +65.8%yoy in 4QFY20) during the quarter compared to the previous year while developed market volume was by +23.3%yoy (+21.8%yoy in 4QFY20). Higher sales volume in developing nations shows that glove usage per capita are increasing compared to the pre-pandemic period. We believe that this is an important demand driver post-pandemic as these market catches up with the hygiene awareness of developed nations, which have already reached high glove usage. Asia ex-Japan (countries like China, South Korea and Singapore) recorded the highest growth at +72.9%, followed by Eastern Europe at +56.3%, Latin America at +46.3% Middle East at +15.6% and Japan at +12.4%. Africa saw a drop in sales volume of 59.5%yoy possibly due to the shift in product mix to higher value products. Sales to North America slid 2.0% partially due to the ban on imports by its two subsidiaries by the US Customs and Border Protection (CBP). Management updated that they are at the final stages of fulfilling further enquiries by the CBP and foresees that the issue is closer to its tail end. In terms of sales volume by geography, North America and Western Europe are the biggest at +22% respectively, followed by Eastern Europe at +17% and Asia ex-Japan at +18%.

Improving accommodation of employees. The management have also shared plans on the improvement of its employees’ accommodation following the recent issue of not complying with the Workers' Minimum Standards of Housing and Amenities Act 1990 (Act 446). It recently bought 100 apartments for RM20mill for its workers and rented additional houses to comply with the authorities’ requirement. Going forward, it allocates RM100m for new hostels and houses to accommodate 7,300 employees in tandem with its expansion plans. It is also incorporating workers’ accommodation in the upcoming Factory 42 in its layout plan so that the integrated infrastructure may benefit its employees.

Maintain BUY with an unchanged TP of RM10.96. We increase our FY21E earnings estimates by +8.8% as its 1QFY21 earnings exceeded our previous expectation. Meanwhile, we make no changes to our FY22F earnings estimates. Our TP is based on unchanged PER of 25.0x (10-year historical mean and similar to pre-pandemic level) pegged to FY22F EPS of 43.8 sen. Following the retracement in its share price, Top Glove is trading at a PER of 6.5x FY21E earnings and 15.6x FY22F earnings, which are much lower than its 10-year historical mean of 25.5x PER. We think that its upcoming quarters will remain strong as demand continue to exceed supply while its operations are expected to improve with the reopening of its plants in Meru, Klang. As such, we maintain our BUY recommendation. FY21E dividend yield is attractive at an estimated 8.0% while FY22F dividend yield is estimated at 3.2%.

Source: MIDF Research - 10 Dec 2020