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

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Running With Robust Demand

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%.

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.

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.

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.

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.

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

We raise our Target Price to RM6.05 (from RM5.70) post earnings adjustment. Our Target Price is based on a CY20 PE of 30x. The ascribed PE is based on +1SD of its 5-year mean.
See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
TOPG is trading at 34x FY20 EPS, or above +1.3x SD of its 5-year mean PE or above +2.3SD of its 10-year PE mean.
We maintain our HOLD call as we believe the positives have already been priced in given its rich valuation.

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