Investment Highlights

• We maintain our HOLD recommendation for Top Glove with a lower fair value (FV) of RM5.46 (from RM5.63), based on CY22 FD EPS over an unchanged PER of 23x. Our FV downgrade incorporates an ESG-adjusted discount of 3% for our rating of 2 stars (Exhibit 4).

• Top Glove’s 1HFY21 core net profit of RM5.26bil came in above our expectations at 66% while meeting the street’s expectations at 52%. We increase our FY21 forecast by 7% to RM8.54bil and raise its utilisation rate to 73% while maintaining our average selling price (ASP) assumption at US$80/1,000 pcs. We maintain our forecasts for FY22–23.

• We believe that the rapid progress of mass vaccinations will reduce the urgency of glove orders, causing a drop in glove ASP. The sentiment is echoed through reduced delivery times. Delivery times for nitrile and natural latex gloves have fallen to 170 and 240 days respectively from 200 and 295 days in 1QFY21.

• In particular, the US, which constitutes a large proportion of Top Glove’s customer base, has reached nearly 3 million vaccinations a day. Nevertheless, we maintain the view that post-Covid-19, glove demand will remain stable, bolstered by a wider adoption of gloves in other sectors as well as increased public health awareness.

• In 2QFY21, despite sales volume falling by 8% as a result of production stoppages, revenue grew by 13% QoQ to RM5.36bil due to higher glove ASPs. Nitrile and natural rubber gloves' ASPs rose by 30% and 14% QoQ respectively.

• Likewise, core net profit climbed by 21% QoQ to RM5.26bil despite rising crude oil and natural rubber prices. Margins expanded to 53.4%, representing a 2.2-ppt QoQ increase. Going forward, the company expects the trend of higher revenue and profitability margins to be maintained, supported by elevated ASPs going well into 2HFY21.

• Presently, Top Glove has a total production capacity of 93bil pcs per annum and is aiming to double its capacity by CY2025. A total of 18bil and 35bil pcs will be added in CY2021 and CY2022 respectively. Out of the RM10bil allocated for expansion capex, roughly half will be funded by its HKEX listing.

• The company is still working towards resolving the withhold release order by the US Custom and Border Protection, having recently submitted its corrective action plans. Top Glove plans to allocate RM390mil, or 5% of its HKEX listing proceeds to enhance their ESG practices.

• A special dividend of 20% for the remaining 3 financial quarters in FY21 has been declared in addition to Top Glove’s usual dividend of 50%. We expect Top Glove to pay dividends of 67.5 sen for FY21, translating into a yield of 13%.

Source: AmInvest Research - 10 Mar 2021