Top Glove Corporation - CGS-CIMB Research 2020-09-18: Record High Profit Thanks To COVID-19


Top Glove Corporation - Record High Profit Thanks To COVID-19

  • Top Glove (SGX:BVA)'s FY20 (Sep 2019 to Aug 2020) net profit of RM1.9bn (+403.8% y-o-y) came in above expectations.
  • We expect Top Glove to continue posting stronger quarterly earnings, driven by higher sales volumes from increased capacity and higher ASPs.
  • Reiterate ADD with a higher Target Price of RM10.00 (17x CY22 P/E).

Top Glove's robust 4QFY20 results led to FY20 net profit beating estimates

  • Top Glove's 4QFY20 (Jun 2020 to Aug 2020) core net profit came in at RM1.3bn (+1,513.9% y-o-y), bringing FY20 core net profit to RM1.9bn (+403.8% y-o-y). This was above expectations at 117% of our and 122% of Bloomberg consensus estimates. The earnings beat was due to:
    1. higher sales volume (+5% q-o-q),
    2. significant increases in selling prices, and
    3. better economies of scale.
  • This led to 4QFY20 revenue and net profit rising q-o-q by 84.2% and 271%, respectively.

Key drivers behind record earnings in FY8/20

  • Top Glove's 's FY20 revenue rose 51% y-o-y to RM7.2bn, thanks to increases in both sales volume (+16.6% y-o-y) and average selling prices (ASPs, +27% y-o-y). This brought FY20 EBITDA margins to 35.5% (+21% pts y-o-y), which benefited from higher economies of scale, lower raw material prices and a turnaround in Aspion operations (FY20 net profit: RM126.6m, +1,141% y-o-y).
  • Accordingly, FY20 net profit rose 403.8% y-o-y to RM1.9bn, despite a higher tax rate (+4% pts y-o-y).
  • In 4QFY20, Top Glove's announced an interim dividend of 8.5sen/share, bringing FY20 dividend to 11.8sen/share, within expectations.

Even better results in FY21F from strong demand and higher ASPs

  • We continue to expect Top Glove's to record stronger results ahead, premised on strong global glove demand owing to COVID-19. This should lead to:
    1. further ASP hikes,
    2. higher sales volume, and
    3. better economies of scale.
  • On the back of its strong order visibility (sales lead time for nitrile gloves [NBR] is 18 months; natural rubber gloves [NR] is 13.3 months; vinyl gloves is 8.3 months; and surgical gloves is 3.6 months).

Raising our FY21-22F EPS estimates to account for higher ASPs

  • Given the earnings beat in 4QFY8/20, we raise our FY21-22F EPS by 95-178%. This is to account for higher-than-expected ASPs, with more optimistic guidance provided during Top Glove's FY20 results briefing call today.
  • In our new forecast, we input a higher ASP hike in FY21 (+75% y-o-y), followed by a more gradual decline in FY22-23 ASPs (yoy decline of 22%-35%). This is given our view that the current strong global glove demand should sustain at least until end-CY21. We also introduce our FY23 EPS estimates.

Maintain ADD on Top Glove, with Target Price raised to RM10.00 (17x CY22 P/E)

  • In tandem with our EPS hike, our Target Price is raised to RM10.00, based on 17x CY22 P/E as we roll over our valuation year. Despite its strong earnings prospects, we peg Top Glove's to its current 5-year mean as we acknowledge that FY21 could potentially be a one-off exceptional year.
  • We continue to like Top Glove's , as it is the key beneficiary of higher glove demand owing to COVID-19 given its position as the world’s largest glove maker.

Re-rating catalysts and downside risks

Top Glove's analyst briefing highlights

  • In FY20, total sales volume rose 16.6% y-o-y, mainly driven by higher demand from developing country markets (+25.9% y-o-y) and developed country markets (+7.7% y-o-y). There was a similar trend in 4QFY20, in which total sales volume rose 42.5% y-o-y (developing country markets: +65.8% y-o-y, developed country markets: +21.8% y-o-y). We understand this trend is supported by higher glove usage in developing countries which previously had lower consumption per capita, while sales to developed markets were negated by lower sales to US (US contribution to total sales volume in FY20: 22% vs. 4QFY20: 19%), due to the US Customs and Border Patrol (CBP) ban.
  • Top Glove currently has an order lead time of 620 days for its NBR gloves vs. 540 days in Jun 20. This is viewed as a testament to the strong global glove demand. There is a similar trend for vinyl gloves, as order lead time has increased to 250 days (from 180 days in Jun 20).
  • On the other hand, its order lead time for NR gloves currently stands at 400 days, from 470 days in Jun 20. Top Glove has recently increased its production capacity for NR gloves, given raw material constraints in increasing production of NBR gloves. Also, the current order lead time for surgical gloves has declined slightly to 110 days, from 130 days (Jun 20) as Top Glove has recently ramped up production of its surgical gloves.
  • Given the lower order lead time for NR gloves compared to NBR gloves, Top Glove has been asking its customers to consider purchasing latex gloves. As a result, it expects higher sales of latex gloves in the upcoming quarters, coupled with higher selling prices for NR gloves.
  • At this juncture, Top Glove has allocated 30% of its capacity for spot orders (sold at spot prices at premium ASPs vs. recurring orders). We understand that spot allocations for the NBR segment have been fully sold for the next three months, while it is still filling its allocation for spot orders in the NR segment. Note that we estimate sales volume from spot orders made up 10% of 4QFY20’s total sales volume.
  • On the US CBP ban issue, Top Glove estimates the total remediation payment to be RM53m, subject to finalisation with the CBP. It has made two remediation payments, of RM4.4m each, on 10 Aug 20 and 10 Sep 20. As part of the independent audit report that was submitted to the CBP on 4 Sep 20, Top Glove interviewed 1,100 foreign workers. We understand that Top Glove is currently awaiting the CBP’s reversal of the import ban on gloves to the US imposed on two of its subsidiaries since 15 Jul 20.
  • As of 4QFY20, raw material cost made up 43% of Top Glove’s total production cost. Top Glove expects nitrile raw material prices to go up by 10-15% monthly given the glove supply shortage in the global market. However, Top Glove is not particularly concerned as the additional raw material costs would be more than offset by the quantum of increase in ASPs.
  • Top Glove is of the view that glove ASPs, particularly for NBR gloves, are likely to remain high for up to a year. This is given the shortage of nitrile raw material, leading to difficulties in increasing production of NBR gloves for most glove makers, coupled with elevated global glove demand owing to COVID-19.
  • At this juncture, we understand that ASPs for NBR gloves stand at US$70 per 1,000 pieces while latex gloves are at US$45 per 1,000 pieces. Owing to the strong global glove demand, it expects further ASP increases moving forward. For the NBR segment, it expects increases in ASP of 30% m-o-m in Sep 20 and Oct 20, 15% m-o-m in Nov 20 and an estimated 5% m-o-m from Dec 20 onwards. For the NR segment, Top Glove expects ASP hikes of 20% m-o-m in Sep 20, 5% m-o-m in Oct 20, followed by 10% m-o-m in Nov 20. From Dec 20 onwards, Top Glove expects NR ASPs to rise at a minimum of 5% m-o-m until it starts to see a slowdown in demand for NR gloves.
  • Based on this trajectory, it expects ASPs for NBR gloves to reach US$100 per 1,000 pieces in Nov 20. On the other hand, it expects ASPs for spot orders to potentially reach US$140-150 per 1,000 pieces by Nov 20.
  • According to Top Glove, it expects annual global glove demand to rise by 71% to 485bn pieces p.a. in 2022F from 282bn in 2019. This will mainly be driven by higher demand, especially from countries with lower glove consumption per capita, as well as increased usage in non-medical sectors. With the robust growth rate, Top Glove believes that the surge in global glove demand will outstrip new glove production supply from major manufacturers in Malaysia, Thailand and China.
  • In addition, Top Glove is not overly concerned with the entry of new companies into the glove-making business as these players are less competitive given their smaller production scale, and have limited access to raw material supply given the current supply shortage.
  • Top Glove has earmarked RM8bn in capex to support its expansion plans up to FY26F. Under this long-term plan, it aims to add 100bn capacity on a gradual basis over the next six years. In the next two years (up to 1QFY23F), it aims to grow its annual glove production capacity by 41% to 120.6bn p.a. by end-2022F, from 85.5bn p.a currently.
  • Top Glove also said it is exploring a potential listing on The Stock Exchange of Hong Kong. The company said a Hong Kong listing would provide it with better visibility and increased liquidity. Assuming that it begins the process today, Top Glove could potentially be listed in HK within 6-9 months.
  • See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-18
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