Top Glove - CGS-CIMB Research 2020-09-08: Aiming For Top Results

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Aiming For Top Results

We reiterate our positive view on Top Glove post a recent conference call with management which yielded no major surprises.
Top Glove expects higher ASP, particularly for nitrile gloves at +20% m-o-m in Sep and Oct 20, and another +10% in Nov 20 due to strong demand for gloves.
Maintain ADD with an unchanged Target Price of RM9.20 (18x CY21 P/E).

Owing to COVID-19, Top Glove (SGX:BVA) continues to witness robust glove demand as its sales lead time for nitrile glove is now > 20 months until end-CY21 (natural rubber gloves: 13 months; vinyl gloves: 8 months; surgical gloves: 4 months), from 18 months in Jun 20.
Despite increased newsflow on potential discovery of a COVID-19 vaccine, Top Glove believes that glove usage globally will remain strong even in the event of a discovery of a COVID-19 vaccine, mainly due to increasing healthcare and hygiene awareness in developing countries, as well as increased usage in both medical and non-medical sectors.

Top Glove expects further ASP increases for nitrile gloves at +20% m-o-m in Sep and Oct 20, and potentially another +10% m-o-m in Nov 20. Besides, Top Glove also sees ASPs for latex gloves increasing 5% m-o-m in Sep and Oct 20. This is also supported by Top Glove recently receiving more spot orders until end-CY20F as it expects to allocate up to 30% (from 20- 25% previously) of its total capacity for spot orders going forward.
Note that our current FY20F/21F/22F ASP growth estimates stand at +22%/+45%/-36%.

We gather that Top Glove has recently seen shortages in supply of nitrile butadiene (NBR), leading to 10-15% m-o-m increases in NBR costs. Top Glove expects NBR supply to remain acute in the near term as new supply is expected to kick-in only by end-CY21F. However, Top Glove said it is not overly concerned about this as the quantum of ASP hikes will be more than sufficient to offset the raw material price increases.

Based on the ASP assumptions as guided by Top Glove’s management, we estimate that the blended ASP for FY20F will be US$54.4 per thousand pieces, higher than our forecast of US$38 per thousand pieces. We do not revise our ASPs for FY21F as we assume new supply will kick in by 2H21F which could lower ASPs.

On 7 Sep, Top Glove said it had submitted to the US Customs and Border Protection (CBP) the Independent Auditors’ Report in relation to remediation payments. This is post the completion of the report which also addresses the relevant areas of concern identified by CBP. See Top Glove Announcements.
Top Glove had on 10 Aug made a first payment of RM4.4m of the estimated remediation fee of RM53m; a second payment is expected by 10 Sep. We believe this is an one-off impact that should not affect its profitability in the longer term.

Top Glove’s shares went ex-bonus on 3 Sep 20, post the issuance of 5476.9m new bonus shares, increasing the group’s share base to 8,215.5m shares. The enlarged share base assumes all the outstanding employees’ share option scheme (ESOS) of RM23.5m is granted and US$30.3m (RM123.5m) 5-year Guaranteed Exchangeable Bonds are converted into 20.2m new Top Glove shares. The bonus issue is expected to enhance the trading liquidity as well as affordability of Top Glove shares.
Post this exercise, our ex-bonus Target Price is adjusted to RM9.20, based on an unchanged 18x CY21F P/E (in line with its 5-year mean).

No changes to our FY20-22F EPS. We retain our ADD call and ex-2-for-1 bonus issue Target Price of RM9.20 (18x CY21 P/E, in line with its 5-year mean) for Top Glove.
We like Top Glove as the key beneficiary of the current supply-demand dynamics in the glove sector due to COVID-19 as it is the largest glove maker globally by capacity (85.2bn pieces p.a. as at 31 Aug 20).

Potential re-rating catalysts include stronger-than-expected margin expansion and better-than-expected increase in selling prices.
Downside risks: discovery of a cure/vaccine for COVID-19, stiffer competition leading to downward pressure on pricing, and a spike in raw material prices.
See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

See recent SGX market update: Trio of SGX Rubber Glove Makers Report Earnings Surge.
Top Glove is set to announce its 4QFY8/20 (Jun 2020 to Aug 2020) results by 17 Sep 20. We expect Top Glove to record a historical-high net profit of RM1.0bn-1.1bn in 4QFY20 based on our forecast, which marks the first billion net profit achieved in a single quarter. This is on the back of:
1. spikes in ASPs being fully reflected in the quarters ahead,
2. additional new capacity coming on-stream as scheduled, and
3. better economies of scale.
See also report: UG Healthcare - CGS-CIMB Research 2020-09-07: The Best Is Yet To Come.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-08

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