Top Glove - Maybank Kim Eng 2020-03-20: All Stars Aligned

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - All Stars Aligned

Imputing for stronger USD; maintain BUY

• Top Glove (SGX:BVA)'s 2QFY20 results was better q-o-q without much contribution from COVID-19. Earnings in 2H could be substantially stronger with the confluence of all positives (solid demand, stronger USD vs. MYR and lower rubber costs).
• We raise our FY20-21E EPS by 9% p.a. and maintain our FY22E. However, our Target Price is lowered to MYR6.32 (-5%) as we lower our CY21 P/E to 30x (from 34x), being its +1SD to 5-year mean in view of the present market volatility.
• Maintain BUY.

2QFY20: Limited COVID-19 impact

• Top Glove's 2QFY20 net profit of MYR116m (+4% q-o-q, +9% y-o-y) brought 1HFY20 net profit to MYR227m (+5% y-o-y), making up 46-48% of our and street’s full-year forecasts. This is above our expectation as we expect a substantially stronger 2H. 2QFY20 net profit only grew 4% q-o-q on the back of sales volume growth of 2% q-o-q and higher EBITDA margin of 17% (+0.6-ppt q-o-q).
• Latex glove margins improved as the competition subsided and nitrile gloves was also better on lower NBR cost (-5% q-o-q).

2HFY20E: Supernormal earnings

• We expect supernormal earnings in 2H:
  1. higher sales volume of 8-10% h-o-h. Though its weekly sales order has more than doubled and its sales lead time has jumped to 4 months (pre-COVID 19: 1-1.5 month), its sales volume growth is capped by its capacity growth of 8% h-o-h in 2H. Its present plant utilisation rate has risen to 90% (2QFY20: 85%) and it is difficult to raise further to 95% due to the shortage of workers;
  2. margin will expand on the higher operating leverage, higher ASPs (+c.5% in end-Feb 2020), stronger USD vs. MYR and falling rubber costs.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Raising FY20-21E EPS by 9% p.a.

• Presently, USD vs. MYR stands at 4.41 and averaged 4.16 for YTD FY20E. We raise our USD vs. MYR assumption to 4.30 for FY20-21E (from 4.15) and maintain 4.15 for FY22E. Hence, our FY20-21E EPS is raised by 9% p.a. while our FY22E EPS is retained.
• Every 1% change in USD vs. MYR will affect our FY20E EPS by 3%. Assuming valuation reverting to mean CY21E P/E of 22x, the implied fair value for Top Glove would be MYR4.60.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-03-20

SGX Stock Analyst Report BUY MAINTAIN BUY 6.32 DOWN 6.650