Top Glove - CGS-CIMB Research 2020-05-27: Still Has Room To Grow ASPs

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Still Has Room To Grow ASPs

• We turn more positive on Top Glove’s earnings prospects as we expect more aggressive ASP increases, leading to stronger margin expansion.
• With a longer order lead time of 11-12 months, Top Glove is likely to be able to push for higher ASPs given the current favourable supply-demand dynamics.
• Reiterate ADD, with a higher Target Price of RM16.50 (36.8x CY21 P/E).

More positive catalysts on pent-up demand for gloves

• We gather that Top Glove (SGX:BVA)’s current order lead time has further extended to 11- 12 months (vs. our assumption of 8 months previously), which gives Top Glove a longer order book visibility to up to May-Jun 2021F. This is given the favourable supply-demand dynamics in the glove sector (owing to Covid-19).
• We understand that Top Glove is witnessing stronger demand from its existing customers and new customers (mainly end-customers such as government and non-government organisations).

Inputting more aggressive ASP increases into our assumptions

• With the strong global glove demand and longer order book visibility, we believe that Top Glove will be able to raise its ASPs more aggressively. In our previous forecast, we expected Top Glove to raise its ASPs by 5% per month between Jun and Oct 2020.
• In our new forecast, we believe Top Glove will be able to raise its ASPs by 10% per month from Jun to Dec 2020. Based on our sensitivity analysis, a 1% increase in ASPs will lead to a 5.5- 7.2% increase in our FY20-22F EPS estimates.

Sufficient capacity to target ad-hoc orders.

• We gather that Top Glove has been receiving more ad-hoc orders (10-20% of total glove sales). These orders are mainly from non-government and government organisations and typically have higher selling prices (premium of > 30%) vs. recurring orders. In our view, Top Glove is able to cater to these ad-hoc orders as it has excess capacity, especially in the latex segment (running at ~80% utilisation rate as at Feb 20 pre-Covid-19).
• Also, Top Glove will be able to leverage new glove capacity as its total production capacity will rise by 8% (+5.9bn pieces p.a.) to 79.7bn pieces p.a. by end-2020F.

Raising our FY20-22F EPS by 7.8-44.9%.

• We raise our Top Glove's FY20-22F EPS by 7.8-44.9% due to:
  1. higher ASP increases, and
  2. better profit margins from higher economies of scale and
  3. lower raw material prices (nitrile butadiene and natural latex prices have declined 14% and 7% YTD, respectively).

Reiterate ADD, with a higher Target Price of RM16.50.

• We retain our ADD call on Top Glove, with a higher Target Price of RM16.50, pegged to 36.8x CY21 P/E, in line with +2 s.d. from its 5-year mean vs. 32x previously (+1.5 s.d.).
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
• In our view, Top Glove, as the largest glove maker globally in terms of production capacity (73.8bn pieces p.a.), is the key beneficiary of the favourable supply and demand dynamics in the glove sector currently, allowing it to capitalise on pent-up demand for gloves due to Covid-19.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-27

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