Top Glove Corporation - DBS Research 2021-03-10: Robust ASP To Normalise Gradually

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove Corporation - Robust ASP To Normalise Gradually

• Top Glove's stellar 2QFY21 net profit of RM2.9bn was better than expected.
• Valuations are undemanding at 13x FY22 EPS, even factoring in normalisation of ASPs from FY21 onwards.
• Funds raised from HK listing increases scope for inorganic expansion, in our view.
• Maintain BUY on Top Glove with lower target price of RM7.25.

Top Glove's earnings driven by volume and ASP

Stellar quarter.

• Top Glove (SGX:BVA) registered another record net profit of RM2.9bn in 2QFY21 (+2,380.1% y-o-y; +20.8% q-o-q). 1HFY21 earnings of RM5.2bn (+2,209.4% y-o-y) was ahead of our expectations but in line with consensus.
• Top Glove declared a dividend per share (DPS) of 25.2 sen in 2QFY21. Its payout ratio is 70% which includes a 20% payout as special dividend.

Record-high revenue and net profit.

• Top Glove's 2QFY21 revenue came in at RM5.4bn (+336.3% y-o-y, +12.7% q-o-q), supported by higher sales volume (+19.0% y-o-y, -8.9% q-o-q) and higher blended ASP (+273.7% y-o-y, +25.9% q-o-q).

Stronger EBIT/k gloves.

• Earnings before interest and taxes (EBIT)/k gloves came in at RM226.31 (+2,002.3% y-o-y, +31.9% q-o-q). The significant improvement in EBIT/k gloves was mainly due to the higher ASP and lower per unit fixed costs, thanks to optimal utilisation rate leading to economies of scale.

Outlook

Heightened hygiene awareness to support glove demand post-pandemic.

• We expect annual global glove demand growth to increase by 25% and 15% y-o-y for 2021 and 2022 respectively. This is stronger than pre-COVID-19 annual glove demand growth of 10-12% y-o-y. Post-pandemic growth is projected to be higher than pre-pandemic growth due to heightened hygiene awareness in the medical and non-medical sectors. Annual demand is expected to grow 15% y-o-y post-pandemic.
• Nevertheless, we expect ASP to gradually decline as supply catches up with demand. Although partly mitigated by higher volumes, this will likely result in lower earnings for Top Glove in FY22-23F.

Accelerating capacity expansion.

• In Top Glove’s latest update, its total installed capacity stands at 93bn pieces of gloves. Currently, it is targeting to increase capacity to 111bn pieces by the end of December 2021 and to 146bn pieces by the end of December 2022.
• Nonetheless, its aggressive expansion is subject to prevailing market demand and can be adjusted to a slower clip in line with market conditions.

Capex expectations.

• Top Glove has planned for RM10bn capital expenditure (capex) over the next five years. It is aiming to increase total installed capacity by 112bn pieces of gloves to 205bn by CY24. The capex will also be utilised for the enhancement of existing manufacturing facilities, Industry 4.0 initiatives, a gamma sterilisation plant, land bank for future expansion, information technology (IT) upgrades and workers’ facilities. For FY21, the capex allocation is RM1.9bn.

Funding for growth.

• Top Glove’s expansion of its factories totalling up to RM4.61bn includes building eight new factories by the end of 2024 with four factories in Klang, one factory in Sadao, and one factory each in Banting, Kulim and Ipoh. It is also looking to expand, upgrade and modify existing factories that have reached high utilisation rates of 93% as of January 2021.
• With the increase in share base of up to 1.5bn new shares, we expect a dilution in EPS. From our calculation based on the RM7.7bn raised and 1.5bn new shares, FY21 EPS would be diluted by ~15%. In our model, we have factored in the proposed dual listing on the Hong Kong Stock Exchange, increased capacity plans and higher share base.

Top Glove's valuation

Maintain BUY with lower target price of RM7.25.

• Top Glove's valuations are attractive at 13.3x FY22 EPS, despite our forecast factoring in normalisation of ASPs from FY21 onwards. At these levels, we believe the stock has priced in the lower ASPs.
• We change our valuation method to DCF from P/E multiple previously to capture the normalisation of super normal profits of FY20-21 from FY22 onwards. We have also increased our share base to include the upcoming dual listing on the Hong Kong Stock Exchange.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Siti Ruzanna Mohd Faruk DBS Group Research | https://www.dbsvickers.com/ 2021-03-10

SGX Stock Analyst Report BUY MAINTAIN BUY 2.38 DOWN 3.420