Top Glove - Maybank Kim Eng 2020-12-10: Best Is Yet To Come

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Best Is Yet To Come

Estimate Top Glove's FY21-23E P/E of 5x/9x/18x; maintain BUY

• Top Glove (SGX:BVA)'s 1QFY21 (Sep 2020 to Nov 2020) core net profit (+2x q-o-q) beat street’s expectations.
• We expect a stronger 2QFY21 on ASP hike of c.30% q-o-q and flattish sales volume. We maintain our FY21 earnings forecast but raise our FY22-23E earnings forecast by 50%/73% on higher ASPs.
• We derive our new target price of MYR8.65 (-9%) based on DCF methodology (from P/E), which assumes for WACC of 8.2% (higher than our assumed WACCs for other glove players as we account for its social compliance issues) and LTG of 4.5%.
• Top Glove's estimated dividend yield of 11%/6% in FY21- 22 is also attractive.

Top Glove's 1QFY21 within ours but above street’s expectations

• Excluding the contribution to government’s COVID-19 fund (MYR185m), Top Glove's 1QFY21 core net profit of MYR2.56b (+2x q-o-q, +23x y-o-y) accounts for 23% and 31% of our and street’s full-year forecasts.
• A first interim dividend of 16.5sen was declared (in line with its latest quarterly dividend payout policy) and the profit payout of 56% is higher than its payout policy of 50%.
• Also, Top Glove's net cash swelled to MYR3.44b (from MYR1.04b as at Aug 20).

Top Glove's 1QFY21 key takeaways

• Key takeaways from Top Glove's 1QFY21 results:
  • Revenue grew 53% q-o-q as the higher ASP (+56% q-o-q) outweighed the lower USD vs. MYR (-2% q-o-q).
  • Sales volume was flattish q-o-q as the capacity growth (+c.13% q-o-q) offset the 2-week shutdown-led lower plant utilisation rate of c.85% (4QFY20: c.96%). Additionally, nitrile sales volume fell 8% q-o-q due to shortage of NBR raw material supply;
  • EBITDA margin jumped to 70% (4QFY20: 54%) given the higher ASPs.

ASP and cost trends

ASP hikes still ongoing

• For Jan 21, the ASP for nitrile gloves is increased by 10% m-o-m while the ASP for latex gloves is increased by 5% m-o-m. As for Feb 21, management guided that the ASP hike could be around 5% m-o-m given the higher base now.
• Meanwhile, the average spot price for nitrile gloves remains high at USD140- 150/k pcs, with some of the spot orders in Jan-Feb 21 at a higher spot price of USD180/k pcs. As for the latex powder free gloves, the spot price is also higher at USD85/k pcs now (from USD75/k pcs previously).
• As such, Top Glove's management has guided for its blended ASP in 2QFY21 (Dec 2020 - Feb 2021) to increase by 30% q-o-q.

Raw material cost spiked but still manageable

• Given the shortage of the NBR latex, the NBR price has jumped to USD2,500/t presently (+2.6x from the bottom in Apr 20) and may continue to rise until new NBR capacity comes on stream in 2H21. Assuming the NBR cost increase at a rate of 20% m-o-m, we estimate that Top Glove's’s NBR cost could increase 80% q-o-q in 2QFY21.
• As for the natural latex cost, due to the heavy rain in Thailand, it has spiked up to MYR7.50/kg in end-Oct 20 (+86% from the bottom in Apr 20). However, the price has since retreated by 20% to MYR5.90/kg presently on the normalisation of weather. Assuming the natural latex cost stays at current level, the latex cost would be just 4% higher q-o-q in 2QFY21.
• Though NBR cost is at a premium to that of latex, the margin of nitrile gloves remains superior to that of latex as nitrile gloves ASP is around 70% higher than that of latex powder free gloves. Hence, Top Glove's would increase its nitrile glove production in 2QFY21, in order to maximise its profit.

Our earnings forecasts

• We maintain our Top Glove FY21 earnings forecast and raise our FY22-23 earnings forecast by 50%/73% respectively. This is largely premised on higher ASP assumptions as we raise our FY22-23E blended ASPs by 34% and 28% respectively, to be in line with our ASP assumptions for Hartalega and Kossan.
• In contrast, the glove players, such as Top Glove, are projecting for demand to outstrip supply for the next 3 years.
• We now project for its blended ASP to jump 3.1x in FY21E and to fall 32%/27% in FY22-23E as the new supply could catch up with demand.
• In view of the rising raw material costs, we also raised our NBR cost assumption by 75%/57% in FY22-23E and latex cost assumption by 18% p.a. in FY22-23E.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-12-10

SGX Stock Analyst Report BUY MAINTAIN BUY 8.65 DOWN 9.530