Top Glove - CGS-CIMB Research 2020-05-13: Big Is Beautiful

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Big Is Beautiful

• We reiterate our positive view on Top Glove (SGX:BVA), post hosting a conference call with its management for 60 buy-side analysts and fund managers.
• Top Glove is confident of posting margin expansion in coming quarters from:
  • higher glove sales,
  • better pricing, and
  • lower raw material prices.
• Maintain ADD with an unchanged Target Price of RM10.40 (32x CY21 P/E).

Secured orders up to Apr 2021

• The Covid-19 pandemic has resulted in Top Glove securing glove orders up until Mar-Apr 2021. This indicates that its current order lead time has been extended to 10-11 months (from an average of 30-40 days pre-Covid-19), which is testament to the current strong global glove demand.
• In order to prevent customers from forfeiting their orders nearer their delivery dates, Top Glove now requires a 20% deposit before locking-in capacity for its customers.

More ASP increases on the cards

• We gather that ASPs that are quoted to its customers are revised on a monthly basis, depending on supply-demand dynamics in the sector.
• Given the current robust global glove demand, Top Glove is planning to raise ASPs by 5% monthly from the period of Jun to Aug 2020, and by 10% monthly from Sep 2020 onwards. This is post raising its ASPs by 3-5% monthly for the period of Feb-May 2020.

Current strong global glove demand likely to continue

• Top Glove also shared its view that the current global glove demand is likely to remain robust for at least the next 10-12 months. This is given that Top Glove has never before witnessed such strong glove demand, leading to its current 10-11 months order lead time.
• During the last global disease outbreak (H1N1 in 2010-11), we gather that Top Glove’s order lead-time was only four months and it witnessed robust global glove demand that was sustained for up to five quarters.

Potential margin expansion from 3QFY8/20 onwards

• Top Glove expects to record higher EBITDA margin of 25-26% from 3QFY8/20 onwards. (1HFY8/20: 16.3%). This is on the back of:
  1. surge in glove demand leading to higher sales and ASPs,
  2. higher economies of scale, and
  3. favourable operating environment (lower raw material prices and weaker RM/US$).
• Note that, this is broadly in-line with our FY20F EBITDA margin estimates of 20.1%.

Maintain ADD with an unchanged Target Price of RM10.40

• As the world’s largest glove maker in terms of capacity, Top Glove is the key beneficiary of the current favourable supply-demand dynamics in the glove sector, allowing it to capitalise on pent-up demand for gloves due to Covid-19.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
• Re-rating catalyst: better-than-expected demand for gloves.
• Downside risks: discovery of cure/vaccine for Covid-19, stiff pricing competition, and spike in raw material prices.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-13

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