Top Glove - CGS-CIMB Research 2020-12-09: Undervalued At Current Prices

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Undervalued At Current Prices

• We deem Top Glove's 1QFY21 net profit of RM2.6bn (+2,198% y-o-y) to be in-line at 24.7% of our FY21F estimate but above Bloomberg consensus.
• Top Glove should record stronger results in quarters ahead, backed by:
  1. higher ASPs,
  2. increase in production capacity, and
  3. higher economies of scale.
• We reiterate our ADD call for Top Glove with a lower target price of RM8.90 (16x CY22 P/E).

Top Glove's 1QFY21 core net profit rose 2,198% y-o-y; within expectations

• Top Glove (SGX:BVA)'s 1QFY21 (Aug 2020 to Nov 2020) core net profit jumped 2,198% y-o-y to RM2.6bn, after adding back the one-off donation of RM185m to the government’s COVID-19 fund. We deem 1QFY21 net profit to be in-line with our full-year estimates but above Bloomberg consensus’ (29.7%).
• In 1QFY21, Top Glove declared its first interim dividend of 16.5 sen per share. This represents 56% payout (50% usual dividend policy + 6% special), i.e. above our expectations.

Higher sales volume and ASP hike due to COVID-19

• Top Glove's 1QFY21 revenue rose 293.7% y-o-y due to higher sales volume (+34% y-o-y) and surge in ASPs (+201.8% y-o-y). Thanks to margin expansion and better economies of scale, 1QFY21 EBITDA margins rose 54.1% pts y-o-y to 70.2%, despite higher raw material prices (nitrile latex: +24% y-o-y, natural rubber: +18% y-o-y).
• Top Glove's 1QFY21 core net profit surged 2,198.2% y-o-y to RM2.4bn, despite incurring a higher tax rate of 22.3% (+11.4% pts y-o-y).

Stronger q-o-q results were mainly thanks to higher ASPs

• 1QFY21 revenue rose by 53.1% q-o-q and net profit by 83.9% q-o-q. This was thanks to higher ASPs (+57% q-o-q), which more than offset a weaker US$/RM (-2% q-o-q) and rise in raw material prices (nitrile latex: +39% q-o-q, natural rubber: +13% q-o-q).
• We understand that Top Glove's 1QFY21 sales volume was flattish on a q-o-q basis, given the impact of the first two weeks of the EMCO (17 Nov – 14 Dec 20) on all of its Meru, Klang plants (50% of total capacity) that occurred towards end-1QFY21.

Expecting its Meru plants to be operational on a gradual basis

• Since 24 Nov, TOPG temporarily stopped all of its manufacturing facilities (28 plants – 50% of TOPG’s total capacity) in Meru, Klang. This is in tandem with the implementation of EMCO on TOPG’s worker dormitories in Meru, Klang and to allow for further COVID-19 screening and quarantine of its workers. We gather that TOPG has already commenced operations at seven plants, with plans to recommence operations at seven plants a week for the next three weeks.

Reiterate ADD with a lower target price of RM8.90

• We cut our Top Glove's target price to RM8.90, based on 16x CY22 P/E, -0.5 s.d. of its 5-year mean (previously 17x P/E). The lower P/E is to account for ongoing concerns on ESG-related issues, particularly related to its foreign workers.
• Nevertheless, we still like Top Glove as it is the key beneficiary of higher glove demand due to the COVID-19 pandemic, given its position as the world’s largest glove maker.

Other briefing highlights

• Top Glove expects ASPs to rise 30% q-o-q in 2QFY21, on the back of the strong global glove demand and also to pass on the higher raw material prices.
• Top Glove continues to see very strong order lead time, i.e. an average of one year across all product types. While there has been a decline in order lead time in comparison to 4QFY20, this was attributed to cancellation of orders from traders (due to sharp rise in ASPs) as well as increase in production capacity to fulfill the increase in demand.
• We understand that Top Glove has been actively working with the US Customs and Border Protection (CBP) to address all the issues with regards to forced labour that were raised, and is confident of a swift resolution to the matter in the near term.
• Top Glove will continue to invest in improving its workers hostels, by earmarking RM100m capex for this purpose. Besides acquiring more existing houses and apartments in the areas which the company operates in (earmarked RM30m in the next few years), Top Glove also plans to build two large scale hostels, one in Klang and one in Bangi, which can host 4,200 and 3,100 workers respectively.
• Top Glove also highlighted plans to continue to hire more local employees, as it targets to hire up to 9,000 local workers in FY21. This is to reduce reliance on foreign workers while creating more job opportunities for local residents.
• With regards to the COVID-19 outbreak among its workers in Meru, Klang area, Top Glove highlighted that it has tested a total of 8,868 workers in the area. We understand that 58% of them (5,147) tested positive for COVID-19, but 90% of them (4,636) have been released from hospitals and are certified as fit to work. As such, up to 94% (8,357) of its workers are ready to resume work after the quarantine period.
• Top Glove believes that global glove demand will continue to outstrip supply for the next three years at least. This is given that Top Glove does not expect the incoming new glove supply globally to be able to cater for the increase in global glove usage patterns.
• Top Glove does not expect the rollout of COVID-19 vaccines to lead to a decline in glove usage. On the contrary, Top Glove expects an increase in glove demand in tandem with higher usage due to more COVID-19 testing activities and the administration of COVID-19 vaccines.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Potential re-rating catalysts and downside risks

• Potential re-rating catalysts:
  1. swift resolution of the US CBP ban placed on two of Top Glove’s subsidiaries,
  2. better-than-expected demand for gloves, and
  3. higher-than-expected rise in selling prices for gloves.
• Downside risks:
  • a prolonged closure of Top Glove’s manufacturing facilities in Meru, Klang,
  • faster-than-expected rollout of COVID-19 vaccine, and
  • a sharp decline in ASP for gloves.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-09

SGX Stock Analyst Report ADD MAINTAIN ADD 8.90 DOWN 10.000