Top Glove - UOB Kay Hian 2021-09-20: 4QFY21 Results Weighed By Curtailed Output

SGinvestors.io

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - 4QFY21 Results Weighed By Curtailed Output

• Top Glove's earnings were below expectations as curtailed output and the US export ban weighed on volume sales. ASPs are expected to reach parity ahead of previous expectations. However, this should be partially cushioned by a significant volume pick-up now that the US export ban has been lifted and optimal production has resumed.
• Against the backdrop of a downcycle and possible disappointment to expectations, we do not rule out further downside. Maintain HOLD on Top Glove with a target price of RM3.00.

Top Glove's 4QFY21 below expectations on the back of sharp volume contraction.

• Top Glove (SGX:BVA)’s 4QFY21 core net profit of RM608m (-70% q-o-q, -53% y-o-y) brought FY21 earnings to RM8,055m (+360% y-o-y). This is below our and consensus expectations, accounting for 96% and 93% of full-year estimates respectively. The negative deviation is due to the sharp decline in volume sales. Further, management indicated softening ASPs ahead of our expectations.
• A final dividend of 5.4 sen was declared, bringing cumulative FY21 dividend to 65.1 sen per share

Double whammy weighs on top-line.

• Top Glove's revenue was contracted by 49% q-o-q (-32% y-o-y) to RM2,116m in 4QFY21. This was attributed to:
  1. blended ASP declining by 32% q-o-q (nitrile declined 37%),
  2. US$/RM rate gaining 1.8% q-o-q, and
  3. volume contracting 20% q-o-q due to:
  4. the full impact of temporary stoppage of sales to the US,
  5. disrupted production due to COVID-19 social distancing measures, and
  6. customers opting to hold out for lower ASPs before restocking.

Recovery in volume growth should cushion accelerated ASP decline.

• Going forward, we bring forward our expectations of market achieving equilibrium to end-1Q22 from 1H22. The scale of the COVID-19 vaccination rollout has eased demand while competition arising from China is increasingly more prominent.
• That said, we expect sales volume to recover significantly following:
  1. new guidelines to resume 100% of production once >80% of workforce is fully vaccinated; and
  2. the lifting of the US export sales ban.
• Management expects US demand to fully recover to pre-export sales ban by December. As a result, revenue could see a marginal decline on a q-o-q basis heading into 1QFY22.

Margins contract as ASPs outstrip raw material cost decline against lower economies of scale.

• EBITDA margin softened to 36.9%, or -26.8ppt, against lower ASPs and economies of scale. The decline in ASP was more acute than the raw material cost decline, with latex and NBR cost declining 20% and 8% q-o-q respectively.
• Going forward, margins are expected to normalise further against lower ASPs. However, they should be partially cushioned by improved economies of scale and the still down-trending raw material costs.

Capacity expansion scaled back.

• Top Glove’s outlook on capacity expansion has been scaled back to 162b pieces per annum by 2024 from 205b in its previous guidance in 3QFY21. This implies a 3-year capacity expansion CAGR of 17.4% for 2021-24. Apart from that, management has indicated for ASPs to reach market equilibrium in early-22. This is well ahead of our previous expectation of mid-22.
• Given the drastic deterioration in market demand-supply dynamics, we do not rule out further deferred capacity expansion by both Top Glove and its peers going forward.

Hong Kong listing still intact.

• Top Glove is expected to resume its pursuit of its Hong Kong listing. Recall in Oct 20, Top Glove announced its intention to list in Hong Kong. The deferment appears related to the previously unresolved withhold release order by the US Customs and Border Protection. Now that the WRO has been lifted, Top Glove is expected to finally complete its Hong Kong listing. It previously looked to raise RM4.17b at RM5.25 per share with a 9.7% dilution.
• However, now that the share price has moderated to RM3.06 and with lower capex requirement (deferred capacity expansion) against the backdrop of a robust balance sheet, it is not imperative for Top Glove to raise as much. Therefore, there would be a dilution to our target price, but the exact quantum will be determined when details for the listing are updated.

Top Glove - Revision of earnings forecast

• We cut our FY22-23 earnings forecast for Top Glove by 10% and 17% respectively, off deferred capacity expansion and more conservative ASP assumptions.
• Key downside risks include:
  • swift containment of the COVID-19 outbreak; and
  • disruption to its production or supply chain caused by the COVID-19 outbreak.
• Every -1% deviation from our RM4.20/US$ assumption translates to 1.2% and 1.8% declines to our FY21-22 EPS respectively.

Top Glove - Valuation & Recommendation

• Maintain HOLD on Top Glove with a lower target price of RM3.00 (from RM3.70). Our target price is adjusted in tandem with our trimmed earnings. Further deferred capacity and sub-optimal utilisation rates could weigh on earnings outlook ahead.
• See
  • Top Glove's Share Price,
  • Top Glove's Target Price,
  • Top Glove's Analyst Reports,
  • Top Glove's Dividend History,
  • Top Glove's Announcements,
  • Top Glove's Latest News.
• Should valuations be pegged to -2 standard deviation of 15x 2023, it implies a target price of RM2.55. But for now, Our target price for Top Glove is SOTP-based, derived from the present value of the:
  • expected dividends over FY21-23; and
  • FY23 earnings pegged to Top Glove’s pre-COVID-19 5-year forward P/E mean of 23x. implies a P/E of 19.0x FY23F earnings.

Philip Wong UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-09-20

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.97 DOWN 1.200