KEY INVESTMENT HIGHLIGHTS

• Announced special dividend of additional 20% for 2QFY21 until 4QFY21

• Near-term prospects intact

• Employee welfare under scrutiny and time is required for substantial improvement

• Maintain BUY with an adjusted TP of RM8.29 from RM10.96

Announced special dividend of additional 20% for 2QFY21 till 4QFY21. Top Glove announced that it will be increasing its dividend payout ratio from its usual 50% to 70% for the next three quarters in view of its anticipated exemplary financial performance for FY2021 coupled with strong cash flow. We are positively surprised by the announcement as this is higher than the 56% payout ratio announced in December in conjunction with the release of its 1QFY21 results. We believe that Top Glove will still be able to fulfil its capital requirements even with the higher payout ratio considering its improving operating cash flow. Hence, we increase our DPS assumption to 69.0sen from 55.0sen previously. This translates into a dividend yield of 12.5% for FY21E. That said, we maintain our FY22F payout assumption of 50% and DPS of 22.0 sen, which implies a decent yield of 4.0%.

Near-term prospects intact. We notice that sentiment for the glove companies has turned negative, accompanied by the flurry of news revolving Covid-19 vaccines but channel checks reveal that demand for gloves remain strong with positive momentum for average selling prices. Delivery time for nitrile gloves are expected to be more than one year. All things considered, we believe that Top Glove is on track to deliver record results in FY21E.

Employee welfare under scrutiny and time is required to show substantial improvement. We acknowledge that considerations on environment, social and governance (ESG) weigh higher in sustainable investing. The past issues Top Glove encountered had somewhat dampened some of its ESG aspects and we opine that the company may need some time to rectify them. Among others, the company has committed to improving its employees’ accommodation by setting aside budget to purchase and/or build better housing for them.

Maintain BUY with an adjusted TP of RM8.29 (previously RM10.96). Our new TP is based on -0.5SD of 10-year PER mean of 18.9x as we take into consideration of the works that can be done to further improve its employee welfare. Our TP is pegged to an unchanged FY22F EPS of 43.8 sen. Since the correction of its share price, Top Glove is trading at a PER of 5.3x FY21E earnings and 12.5x FY22F earnings, which makes valuation attractive for a large cap. The sweetener is the bumper dividend for FY21E with an estimated yield of 12.5%.

Source: MIDF Research - 5 Jan 2021