Top Glove - DBS Research 2020-06-12: Record Quarter; Expect Stronger 4QFY20


Top Glove - Record Quarter; Expect Stronger 4QFY20

  • Top Glove's 3QFY20 net profit surged on the back of robust volume and ASP growth; sharp improvement at Aspion.
  • Pricing has improved on m-o-m basis in 4QFY20; setting up for another impressive quarter ahead.
  • Order book has extended up to 420 days from 30-40 days prior to outbreak; ramping up expansion plans.
  • Reiterate BUY with Target Price of RM18.45 on positive earnings outlook.

Top Glove's 3QFY20 within expectations.

  • Top Glove (SGX:BVA) registered a record net profit of RM347.9m in 3QFY20 (+365.9% y-o-y; +200.7% q-o-q), bringing 9MFY20 net profit to RM575m (+98.0% y-o-y). The impressive results were driven by stronger sales volume and average selling price (ASP) as well as lower raw material prices. The results were within our expectations; we anticipate stronger 4QFY20 results.
  • Top Glove declared an interim first single-tier interim DPS of 10 sen in 3QFY20 (vs 3.5 sen in 3QFY19), translating into a yield of 0.6%. We expect a final dividend of 9.7 sen, with a total payout ratio of 50% (same as FY19’s).

Result review

Record-high revenue and net profit.

  • Top Glove's 3QFY20 revenue came in at RM1,688m (+41.8% y-o-y, +37.3% q-o-q), supported by higher sales volume (+24% y-o-y, +25% q-o-q) and higher ASP (+9% y-o-y, +5% q-o-q). The quantum of net profit improvement was greater than that of revenue growth, thanks to lower raw material prices. Natural rubber and natural butadiene prices were down q-o-q and y-o-y in 3QFY20.

Sharp improvement in Aspion’s performance.

  • Aspion continued to positively contribute to group earnings. It registered a profit before tax (PAT) of RM34.3m in 3QFY20 vs RM6.4m in 2QFY20 and RM6.3m in 1QFY20. For 9MFY20, PAT of RM47.0m had far exceeded PAT of RM10.2m in FY19. The strong results were supported by higher production utilisation rate of 70% and increase in ASP.

Stronger EBIT/k gloves.

  • EBIT/k gloves came in at RM24.43 (+232.1% y-o-y, +127.0% q-o-q). The significant improvement in EBIT/k was mainly due to the higher ASP and low raw material prices.


Expect another impressive quarter ahead.

  • We gather that pricing increased by 15% on a m-o-m basis in 4QFY20 on the back of robust demand. Moreover, 20% of total capacity was on spot prices in 4QFY20, which was higher than the usual ASP.
  • Utilisation rate is expected to stay high at 95% vs 85% pre-COVID-19.

Ramping up capacity expansion.

  • In its latest update in June 2020, the total installed capacity stands at 78.7bn pieces of gloves, +5.3bn pieces of gloves compared to 73.4bn pieces of gloves in March 2020. Management revised the planned capacity expansion upwards for CY20 and CY21 in order to capture the robust demand.
  • Currently, Top Glove management is targeting to increase capacity to 86.4bn pieces by the end of December 2020 and to 100.4bn pieces by the end of December 2021 (compared to 81.6bn pieces and 91.1bn pieces respectively). The revised expansion is 6% and 10% higher compared to the Group’s initial CY20 and CY21 targets, if it comes on stream as planned.

4QFY20 glove demand to come from US and Latin America.

  • The COVID-19 outbreak has led to increased demand for gloves. At the initial stage of the coronavirus outbreak in February-March 2020, the increased sales orders came from China, Hong Kong, Singapore and Korea. Top Glove also received strong sales orders from other regions such as Europe (Germany, Spain and Italy) in 3QFY20.
  • We understand that US and Latin America orders increased in 4QFY20. Latex and nitrile gloves’ order book lead time has increased up to 420 days in June 2020 compared to 300 days in April 2020 and 30-40 days prior to the virus outbreak.
  • Raw material prices are likely to increase by about 10% in 4QFY20. However, the higher ASP should be sufficient to offset the increase in raw material prices.

Stronger balance sheet.

  • Top Glove was in a net cash position as of end-May 2020 (of RM279m) on the back of significant improvement in operating cash flow from the strong profit performance, better working capital management (working capital days was reduced to 32 in 3QFY20 vs 47 in 2QFY20) and conversion of convertible bonds into shares.

Reiterate BUY with Target Price of RM18.45.

Potential Catalysts:

  • Stronger-than-expected ASP and sales volume will further drive the company’s earnings and Top Glove share price. Every 1% improvement in net margin could boost Top Glove’s net profit by 7.4%. A second wave of COVID-19 infections after the gradual easing of lockdowns could see glove demand sustained at high levels.
  • In the long term, even as infection rates ease, we expect COVID-19 to drive increased usage of gloves globally, sustaining a “new normal” of demand.

Malaysian Research Team DBS Group Research | Siti Ruzanna Mohd Faruk DBS Research | https://www.dbsvickers.com/ 2020-06-12
SGX Stock Analyst Report BUY MAINTAIN BUY 6.010 SAME 6.010