Top Glove - UOB Kay Hian 2021-03-10: 2QFY21 Continues To Sustain Stellar Results But Approaches Peak


Top Glove - 2QFY21 Continues To Sustain Stellar Results But Approaches Peak

  • Top Glove's 2QFY21 earnings were within expectations despite being weighed by lower volume output. The quarter saw another change in ASPs, which should peak in 3QFY21. Positively, nitrile cost has eased while utilisation rates are expected to fully recover.
  • Despite sentiment diminishing, industry prospects remain intact with Top Glove’s valuations remaining compelling with attractive dividends.
  • Maintain BUY and target price of RM7.60.

Top Glove's 2QFY21 resuts within expectations with ASPs closing in on its peak.

  • Top Glove (SGX:BVA)’s 2QFY21 core net profit of RM2,869m (+12% q-o-q, +2,373% y-o-y) was within our and consensus expectations, accounting for 49% and 53% of full-year estimates respectively. Heading into the subsequent quarter, we expect peaked average ASPs and increased volume output to more than offset rising input cost to see peak quarterly earnings.
  • Overall demand visibility appears sustained up till 4Q21.
  • An interim dividend of RM0.252 was declared, bringing cumulative 1HFY21 dividend to RM0.417 per share. The interim dividend represented a dividend payout of 70%, in line with Top Glove’s intention of a 20% special dividend to supplement its usual 50% payout.

Revenue growth tempered by production stoppages.

  • Top Glove's revenue grew 13% q-o-q (+336% y-o-y) to RM5,366m in 2QFY21. This was attributed to:
    1. blended ASP rising by 23% q-o-q,
    2. US$/RM rate sliding by 2.3% q-o-q, and
    3. volume contracting 8% q-o-q arising from an outbreak of COVID19 temporarily affecting production.
  • The resumption of production alongside its capacity expansion should see output improve by 10-15% q-o-q heading into 3QFY21 to supplement revenue growth going forward.

Delivery lead time shortened to 170 days from 510 days in 1QFY21.

  • This is attributed to new capacity and the availability and efficacy of the COVID-19 vaccines. We also gather that it is a function of ASPs as well, given that its peers’ ASPs are still catching up with Top Glove.
  • However, we expect ASPs to peak in 3QFY21 as April nitrile ASPs have begun to normalise by -5% m-o-m to US$105/‘000 pcs. This is followed by ASPs normalising by 3-5% beyond that, which is largely within our expectations.

ASP hike continues to far outweigh nitrile cost uptrend.

  • EBITDA margin expanded to 70.5%, or 4.4ppt, against higher ASPs. Margins were tempered by raw material costs seeing changes in cost and unfavourable forex (-2.3% q-o-q). Latex and nitrile costs came off a low base and rose 16% and 63% y-o-y respectively. The nitrile cost has since normalised but latex should see an uptick as it heads into the wintering season.
  • Going forward, margins should peak alongside earnings in 3QFY21 against the backdrop of improved margins and output.

Headway made with CBP and Act 446.

  • In relation to Top Glove’s Withhold Release Order or a detention order on gloves manufactured by Top Glove, issued by the US Customs and Border Protection, management believes it is very close to resolving the issue. The appointed independent consultant assessed that there were no systemic forced labour practices by Top Glove. Furthermore, as of Feb 21, Top Glove has fully complied with Act 446, a local regulation on employees’ minimum standards of housing accommodation.

Punitive share issuance associated with dual primary listing.

  • Top Glove has proposed the issuance of 1.495b new windfall earnings, the capacity expansion could have been well funded by internally generated funds based on our estimates. As a result, it appears that the corporate exercise is likely to be dilutive to EPS, depending on HKEX, the potential dilution to EPS appears particularly punitive.
  • Top Glove expects the listing to be completed by May/June 21.

We leave our earnings forecasts unchanged.

Maintain BUY with target price of RM7.60.

  • Our target price is based on a P/E of 18.5x or close to -1.5SD of its 5-year forward P/E mean. The below mean P/E peg reflects Top Glove’s normalising windfall earnings. Despite its sentiment has far outpaced the extent of normalising ASPs.
  • Our target price could be adjusted by up to -12.2%, or RM6.75, should Top Glove's share reissuance in regard to its dual primary listing be fully taken up.

Philip Wong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-10
SGX Stock Analyst Report BUY MAINTAIN BUY 3.420 SAME 3.420