Top Glove Corporation - CGS-CIMB Research 2020-07-22: The Show To Go On

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove Corporation - The Show To Go On

• We reiterate our positive view on Top Glove with the prospect of higher-than-expected ASPs in light of strong glove demand.
• Top Glove highlighted that ASPs should rise by 25% m-o-m in Aug 20, followed by a minimum 5% m-o-m increase until end-CY20F (1QFY8/21).
• We reiterate our ADD call with a Target Price of RM29.30 (18x CY21 P/E).

Current strong global demand is a boon to Top Glove

• Our recent channel checks with Top Glove (SGX:BVA) indicate that global glove demand remains robust owing to Covid-19. It has an average lead time of 560 days for nitrile gloves (NBR) and 460 days for latex gloves (NR) which is a historical high.
• Top Glove believes that current demand for gloves can be sustained given the recent surge of new Covid-19 cases worldwide which could lead to a second wave of Covid-19.

ASPs could increase by more than initially expected

• With the strong global glove demand, Top Glove stated that it is able to raise its average selling prices (ASPs) by a quantum that beats our expectations. We gather that Top Glove’s ASPs are slated to rise by 25% m-o-m in Aug 20, which is an 85% hike since Feb 20 (pre Covid-19).
• After Aug 20, Top Glove is confident of raising ASPs further by at least 5% m-o-m until end-CY20F (1QFY8/21) given the current environment. Note that, our new ASP estimated for FY20/21/22F stand at +22%/+45%/-36% vs. +15%/+35%/-30% previously.

Not overly concerned on CBP’s ban on two Top Glove subsidiaries

• On 15 Jul, US Customs placed a detention order (allegations of forced labour) on two Top Glove's subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd (US sales by both units make up 9-10% of Top Glove’s 9MFY8/20 total sales). We are not overly concerned about this, as Top Glove is confident of resolving this issue with CBP in a month’s time. If this issue drags beyond a month, we believe that Top Glove could choose to ship its gloves to other countries, which could offset revenue lost from this ban. See also report: Top Glove Corporation - CGS-CIMB Research 2020-07-16: A Speed Bump On The Road Ahead.
• We estimate Top Glove's FY20 EPS could dip by 0.4% for every week this ban is in place, assuming a total loss of revenue (gloves are not shipped and sold elsewhere).

Raising our FY20-22F EPS mainly to account for higher ASPs

• We expect Top Glove to record a sequentially stronger quarter profit in the upcoming results in 4QFY8/20, mainly driven by higher ASPs (spike in ASPs are fully reflected in this quarter onwards) and increase in sales volume. We raise our FY20-22F EPS by 15.9- 43.5% to account for both factors, particularly higher-than-expected ASPs.

Reiterate ADD with a higher Target Price of RM29.30

• In tandem with our EPS hike, our Target Price is raised to RM29.30. This is based on 18x CY21 P/E (in line with its 5-year mean) from 21x CY21 P/E previously.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
• We like Top Glove as the key beneficiary of the favourable supply-demand dynamics in the glove sector due to Covid-19, given that it is the world’s largest glove maker by capacity (80.2bn pieces p.a. currently).
• Re-rating catalyst: stronger-than-expected increase in ASP.
• Downside risks:
  1. sharp decline in ASPs,
  2. longer-than-expected enforcement of the detention order on both Top Glove’s subsidiaries, and
  3. Covid-19 outbreak among Top Glove’s workers.
• See also recent reports:
  • Rubber Gloves – Malaysia - CGS-CIMB Research 2020-07-15: Robust Glove Demand Sustainable.
  • Rubber Gloves - CGS-CIMB Research 2020-07-18: Expecting Higher ASPs Of Gloves In The US.
  • Rubber Gloves - CGS-CIMB Research 2020-07-20: Blue Skies Ahead.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-22

SGX Stock Analyst Report ADD MAINTAIN ADD 29.30 UP 25.000