Top Glove - CGS-CIMB Research 2020-06-11: The Best Is Yet To Come

SGinvestors.io

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - The Best Is Yet To Come

• Top Glove's 9MFY8/20 net profit of RM575m (+97.9% y-o-y) was in line with our forecast, but above Bloomberg consensus’ estimates.
• We expect Top Glove to record sequentially-stronger quarters ahead, in tandem with capacity increases and more ASP hikes.
• Maintain ADD with an unchanged Target Price of RM25.00 (22x CY21 P/E).

Top Glove's 9MFY8/20 net profit rose 97.9% y-o-y; within our expectations

• Top Glove (SGX:BVA)’s 3QFY8/20 net profit came in at RM347.9m (+366% y-o-y), bringing 9MFY8/20 net profit to RM575m (+97.9% y-o-y). We deem this as within our expectations (42% of our full-year forecast), but above Bloomberg consensus’ estimates (63% of theirs). This is given our expectations of stronger q-o-q and y-o-y results in 4QFY20.
• Top Glove also announced an interim dividend of 10sen/share, within our expectations.

Top Glove's 3QFY8/20: Boosted by ASP hikes and sales due to Covid-19

• Top Glove's 3QFY8/20 revenue rose 37.3% q-o-q, thanks to increases in both sales volume (+25% q-o-q) and average selling prices (ASPs) (+5% q-o-q). Besides benefiting from the higher revenue, 3QFY20 EBITDA margins expanded to 28.4% (+11.8% pts q-o-q), thanks to:
  1. better economies of scale (utilisation rate rose 10% pts q-o-q to 95%),
  2. lower raw material prices (nitrile butadiene: -10% q-o-q & natural rubber: -1% q-o-q), and
  3. stronger US$ vs. ringgit (+5% q-o-q).
• Accordingly, 3QFY20 net profit rose 201% q-o-q to RM348m, despite higher tax (+6% pts q-o-q) and increase in depreciation charges (+5.3% q-o-q).

Order book visibility continues to rise beyond 1HCY21

• Top Glove expects demand for gloves to be strong until at least 3QFY8/22. This is given that its order lead time as at Jun 20 has risen by 13-14 months to Jul-Aug 21 (from 10 months at Apr 20). In addition, it is also seeing an increase in spot orders, with the company planning to allocate 20% of its capacity catering to spot orders (our current estimates input only 10% spot orders) that enjoy higher selling prices (2-3x of recurring orders).

Expect sequentially-stronger results up to FY21

• Going forward, we expect Top Glove to continue recording sequentially-stronger results on a quarterly basis in FY21. This is premised on:
  1. higher glove sales,
  2. further increase in ASPs, and
  3. better economies of scale.
• We gather that Top Glove plans to gradually raise its ASPs (+30% q-o-q in 4QFY20 followed by +15.7% q-o-q in 1QFY22) with the gradual commissioning of new production capacity of 26.6bn by end-4QFY21 (36% growth from capacity of 73.8bn pieces p.a. at end-3QFY20).

Maintain ADD, with unchanged Target Price of RM25.00 (22x CY21 P/E)

• Given the in-line results, we make no changes to our FY20-22F EPS. Our ADD call and Target Price of RM25.00 (pegged to 22x CY21 P/E, +0.5 s.d. above its 5-year mean) are also retained.
• We continue to like Top Glove as the key beneficiary of the current favourable supply-demand dynamic in the glove sector due to the Covid-19 outbreak, given that it is largest glove maker by capacity (78.7bn pieces p.a. currently).
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Key highlights of Top Glove's results briefing:

• While Top Glove posted a record profit in 3QFY20, it expects its upcoming quartersto record new highs in terms of quarterly earnings.
• Top Glove plans to continue to ramp up its new capacity due to overwhelming demand following the global Covid-19 pandemic.
• The company also highlighted that it expects higher glove demand from Europe, US and Latin America in the coming quarters, as the Covid-19 outbreak has worsened in these regions.
• Top Glove is allocating 20% of total capacity to spot orders going forward, given the strong demand for ad-hoc gloves. We gather that spot prices for gloves are at least 2-3x of recurring orders.
• Top Glove is of the view that glove demand will sustain for at least the next 1-2 years. This is given that there is still no vaccine found for Covid-19 at this juncture, while the mass production of a vaccine, once that is developed, will still take time to implement.
• As at end-3QFY8/20, Top Glove sits on a net cash of RM279m. It expects its net cash position to improve in tandem with higher net cash flows from operating activities.
• As at 10 Jun 2020, some 64% of its convertible bonds have been converted to shares. Upon full conversion of all convertible bonds, it expects annual interest savings of RM30.5m. Note that our EPS forecast is based on an enlarged share base of 2.7bn, which would have included the full conversion of the exchangeable bonds and exercise of ESOS.
• In 3QFY20, Aspion posted a net profit of RM34.3m (up by more than 436% y-o-y) on the back of higher glove sales, increase in ASPs and better efficiencies.
• Moving forward, Top Glove expects raw material prices to increase slightly due to limited supply. However, it still expects to record margin expansion as the quantum of ASP increase will be more than sufficient to offset the higher raw material costs.

See also recent report: Riverstone Holdings - CGS-CIMB Research 2020-06-11: Higher ASPs On The Cards.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-11

SGX Stock Analyst Report ADD MAINTAIN ADD 25.000 SAME 25.000