Top Glove - DBS Research 2020-03-27: Running With Robust Demand


Top Glove - Running With Robust Demand

  • Top Glove (SGX:BVA)'s sales volume is expected to be stronger h-o-h for 2HFY20.
  • Anticipate stronger ASP due to shortage of gloves.
  • Lift FY20F earnings forecasts by 10% to factor in higher ASP.
  • Maintain HOLD with higher Target Price of RM6.05.

Notes from conference call: Additional orders from Covid-19.

  • The global Covid-19 outbreak has led to higher demand for gloves. At the initial stage of the coronavirus outbreak, the additional sales orders came from China, Hong Kong, Singapore and Korea. Top Glove has subsequently also received strong sales orders from other regions, such as Europe, the US and Australia following its rapid spread to the other parts of the world.
  • We gather that 2HFY20 sales volume could rise h-o-h compared to 1HFY20 on the back of the additional demand. We understand that current utilisation rate is close to 95%.

MCO has no impact to production.

  • The Malaysian government has declared a movement control order (MCO) that runs from 18 Mar to 31 Mar 2020 and this has been recently extended to 14 Apr 2020 to curb the rapid spread of Covid-19. As gloves are classified as essential goods, Top Glove’s production operations have not been restricted.

ASP expectations.

  • In our view, there is room for ASP to increase in the few months in view of the strong demand. We gather the Group’s order backlog has increased.
  • All in all, we expect ASP in 2HFY20 to be higher than 1HFY20. In anticipation of higher ASP, we adjust our FY20 ASP assumption upwards by 1% y-o-y.
  • Profit margin is expected to be better at 9.3% for FY20 compared to 7.9% in FY19 and 9.3% in 1HFY20 on higher ASP and strong volume.

On-track expansion.

  • In its latest update in Mar 2020, the total installed capacity stands at 73.4bn pieces of gloves, +3.3bn pieces of gloves compared to 70.1bn pieces of gloves in Dec 2019. The new capacity coming onstream coincides with the commencement of operations for F2B and F5A, in line with its expansion plan. Other expansion plans for CY20 remain intact, and these include Factory F40, Factory F41 (Vietnam), and Factory F8A (Thailand). These expansions will add a capacity of 8.2bn gloves p.a. for CY20, raising Top Glove’s annual capacity to 81.6bn pieces at the end of CY20.
  • For CY21, Top Glove aims to hit a capacity of 9.5bn pieces of gloves – representing a total 24% increase from the current installed capacity of 73.4bn pieces. We have incorporated management’s capacity expansion guidance into our FY20-21 earnings forecasts.

Perpetual sukuk issuance reduce net gearing.

  • On Feb 20, Top Glove issued RM1.24bn perpetual sukuk which will be utilised to refinance existing borrowings and capital expenditure (capex). The issuance of sukuk will reduce part of the borrowings and interest expenses, while cash on hand and interest income are expected to increase.
  • Based on our forecasts, we are expecting its net gearing to reduce to 0.39x as at end of FY20 compared to 0.93x at end-FY19, as the perpetual sukuk is classified as equity. We do not rule out the possibility that Top Glove will utilise the cash for acquisition activities in the near term.

Scaling up net profit forecasts.

  • We increase our FY20 net profit forecasts by 10% mainly to impute higher ASP, higher interest income and lower interest expense.


Maintain HOLD call with higher target price of RM6.05.

Malaysian Research Team DBS Group Research | Siti Ruzanna Mohd Faruk DBS Research | https://www.dbsvickers.com/ 2020-03-27
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.00 UP 1.890