Top Glove - Maybank Kim Eng 2020-06-12: Just A Warm-Up Stretch


Top Glove - Just A Warm-Up Stretch

Raising Top Glove's EPS and Target Price; maintain BUY

  • Top Glove (SGX:BVA)'s strong 3QFY20 net profit beat expectations on the higher operating leverage. See Top Glove's Announcements. We raise our FY20-22E EPS by 20%/8%/27% as we account for the higher operating leverage. Consequently, our Target Price is raised to MYR21.90 (+10%), based on unchanged 23x CY21 P/E (+0.5 SD to mean).
  • Post-revision, Top Glove trades at CY21 P/E of 18x (below its mean of 19x).
  • We believe Top Glove will continue to re-rate on the ASP hikes momentum and COVID-19 second wave. Maintain BUY.

Results beat ours and street’s expectations

  • Top Glove's 3QFY20 net profit of MYR348m (+3x q-o-q, +4.7x y-o-y) brought 9MFY20 net profit to MYR575m (+98% y-o-y) and accounted for 51%/63% of our/street’s full-year estimates. Results were above our expectation as we expect ASP hikes-led net profit of MYR782m in 4QFY20 (+2.2x q-o-q, +9.8x y-o-y).
  • A first interim DPS of 10sen was declared (+2.9x y-o-y). See Top Glove's dividend history.

3QFY20: Record EBITDA margin of 28%

  • Top Glove's 3QFY20 revenue (+37% q-o-q) was driven by a higher sales volume (+25% q-o-q), a higher blended ASP (+5% q-o-q) and a higher USD/MYR (+5% q-o-q). However, net profit growth (+3x q-o-q) was much higher than the revenue growth with its EBITDA margin jumped to 28% (+11.8-ppt q-o-q, +15.6-ppt y-o-y) on:
    1. A lower raw material cost (NBR: -10% q-o-q, latex: -1% q-o-q);
    2. Higher operating leverage as the plant utilisation rate was > 95% (2QFY20: 85%) and management targets 100% going forward.

Bullish guidance from management

  • Top Glove management guided for ASP hikes of +15% m-o-m in June-Aug and spot orders to account for 20% of its volume. Even if vaccine is successfully developed, management remains confident that the demand will be solid in 2021 on stock replenishment activities and the emergence of new glove users.
  • Our FY20-22E EPS is raised by 20%/8%/27% as we:
    1. raise our sales volume growth by 6%/18%/22% given its faster capacity growth;
    2. reduce our blended ASP assumptions by 3%/6% in FY20-21E;
    3. reduce our distributions and selling, administrative and overhead costs to account for the higher operating leverage.

Our ASP assumptions

  • Management guided that there has been no pushback on its ASP hikes as the supply is scarce. We also understand that some customers even booked its capacity until Dec 2020 at spot price of c.USD60-75/k pieces (+2-2.5x higher than the normal orders). To the customers, the priority is to secure supply and the price has become secondary. Management expects spot sales to account for 20% of its total sales volume, underpinned by its new capacity.
  • To reflect management’s latest guidance, we now assume for ASP hikes of 15% m-o-m for June-Aug and ASP hikes of 5% m-o-m for Sep-Nov 2020. Based on our estimates, Top Glove’s ASPs for the exam gloves would almost double by Nov 2020 (from pre-COVID 19 level in Feb). We have also lowered our spot price assumption from USD100/k pieces to a more sustainable level of USD60/k pieces.
  • To be conservative and to impute for the potential oversupply risk, we assume for the ASP to drop 5-10% q-o-q in 2Q- 4QFY21E as well as zero spot orders in 2Q-4QFY21E (refer figure 2 in PDF report attached below). We now project for its blended ASP to grow 15%/31% in FY20-21E and to drop 31% in FY22E.
  • See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Read also recent SGX market update: Top Glove, Riverstone & UG Healthcare Report Quarterly Earnings

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-06-12
SGX Stock Analyst Report BUY MAINTAIN BUY 21.90 UP 20.000