Top Glove - Maybank Kim Eng 2020-05-29: Massive Earnings Explosion

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Massive Earnings Explosion

Top Glove trading at FY21 P/E of 11x only; maintain BUY

• Massive earnings explosion in the coming quarters will throw brokers’ forecasts out the window. We raise our Top Glove's FY20-22E EPS by 37%/180%/18% as we impute for ASP hikes and spot orders until 1QFY21. We highlight that our FY21E EPS is still conservative as we impute for zero ASP hikes and zero spot orders from 2QFY21.
• Post-earnings revision and pegging at a lower CY21E P/E target of 23x (from 30x; +0.5 SD to 5-year mean), our new Target Price is MYR20.00 (+83%, from MYR10.95). (Using the latest FX rate of 1MYR to 0.3257SGD, we derive target price of 6.51 in SGD term.)
• Top Glove (SGX:BVA) is our top pick.

Optimism from the glove players

Global demand growth: +20% p.a. in 2020-21

• The demand has surged since the outbreak of COVID-19 in Feb 2020. The initial additional demand came from Asia, followed by US, Europe and most recently from Latin America, Russia and India.
• According to the glove players, global demand growth would have been stronger at 30-50% in 2020, if not for the capacity constraint. Hence, glove players expect the global demand growth to be just around 20% in 2020 and another 20% in 2021, with stock replenishment activities supporting the growth in 2021. We understand that the glove distributors and key consumers (i.e. hospitals and clinics) are holding zero or close to zero inventories presently.
• Additionally, the demand is very dire with some glove buyers (i.e. government agencies, NGOs) buying at spot market price (3x higher than the normal ASPs), for the delivery time is shorter (vs. waiting time of 8-12 months for normal orders).
• We also understand that the customers pay 10-50% of the orders as down payments to the glove-makers. This reduces the cancellation risk but the customers can still opt to defer the delivery in the event of overstocking/slower demand.

Capacity growth: +16% and +14% in 2020-21

• For the world’s 5 largest glove producers, we estimate that the combined effective capacity growth is 16% and 14% in 2020-21 respectively. The world’s 5 largest glove producers account for c.55% of global demand share. As the capacity growth lags that of demand growth, this has resulted in severe tight supply with the sales lead time for most players extended to 8-12 months (from 1-2 months before COVID-19).

ASPs still cheap despite the steep hikes

• Though the sales are secured for the next 8-12 months, we highlight that the ASPs are not locked-in and the glove players can still adjust the ASPs 2-3 months prior to the deliveries. Additionally, the indicative ASPs on the purchase orders are based on the +5% m-o-m increase trend. Hence, the customers that gave orders to the glove players are agreeable to the higher ASPs in 1H21.
• Comparing the confirmed ASPs in Sep 2020 against Jan 2020, the ASPs for nitrile gloves and latex gloves have increased 40-50%. Though the ASP hikes are steep, we highlight that the ex-factory price for a pair of nitrile examination gloves is still very affordable at only USD0.06 per pair.

Sector-wide ASP hikes and spot orders

• The sector has seen monthly ASP hikes for most players since Mar 2020 and the ASP hikes are 3-10% m-o-m. Glove players are optimistic that the ASP hikes could last until mid-2021 as they expect the stock replenishment activity to support the demand in 2021 and tight supply situation to persist.
• There is also spot orders (i.e. urgent orders) with high ASPs (3x of normal ASPs) that would boost the glove players’ earnings. Spot orders accounts for c.10% of Top Glove’s sales volume.

Our earnings forecasts for Top Glove

• We raise our Top Glove's FY20-22E EPS by 37%/180%/18% as we:
  1. Raise our blended ASP assumptions by 8%/39%/2% for FY20-22E. This assumes for monthly ASP hikes from Mar to Nov 2020 (3QFY20- 1QFY21) and spot orders from May to Nov 2020 (3QFY20-1QFY21). Though the glove players are certain that they will continue to raise ASPs in 1H21, we conservatively assume that there will be no ASP hikes and no spot orders from Dec 2020 (2QFY21) onwards. Our FY21E ASP growth is 35% and we assume for its FY22E ASP to fall 35% (revert to pre-COVID 19 level);
  2. Raise our sales volume by 1%/14%/7% in FY20-22E as we update for its latest expansion schedule and also assume for a higher plant utilisation rate of 94% in FY21 (from 89% previously).
• Prior to our earnings revision, every 1% increase in ASP would result in 4% increase in our FY21E net profit. However, post-earnings revision, because of the higher ASP base now, every 1% change in the ASP will only increase our FY21E net profit by 2%. Below is our scenario analysis under different ASP hikes.
• We forecast Top Glove's quarterly net profit of MYR247m/MYR659m/MYR950m for 3QFY20/4QFY20/1QFY21.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
• Note that our 1QFY21E net profit accounts for 30% of our FY21E net profit as we assume for zero ASP hikes and zero spot orders from 2QFY21. See PDF report attached below for details. We have also assumed for a larger share base in FY21E (+5%) on our expectation of the full conversion of the exchangeable bonds and exercise of ESOS.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-05-29

SGX Stock Analyst Report BUY MAINTAIN BUY 20.00 UP 10.950