1HFY21 core PATAMI to RM5.2bn (YoY: +22.8x) was in line with ours and consensus forecasts, accounting for 49.3% and 51.4% respectively. We expect Top Glove’s earnings to be flat QoQ in 3QFY21 as lower expected nitrile glove ASPs is expected to be offset by higher NR latex glove ASPs and higher production volumes. We maintain BUY with a marginally higher TP of RM8.14 (from RM8.06) after adjusting for balance sheet items.

In line. 2QFY21 core PATAMI of RM2.9bn (QoQ: +20.7%, YoY: +24.7x) brought 1HFY21 core PATAMI to RM5.2bn (YoY: +22.8x). This is in line with ours and consensus forecasts, accounting for 49.3% and 51.4% respectively. Core PATAMI figure was arrived at after adjusting for forex impact amounting to RM 5.9m.

Dividend. Declared DPS of 25.2 sen goes ex on 23 Mar 2021. 1HFY21: 41.7 sen, 1HFY20: None.

QoQ. Temporary closure of Klang factories due to Covid-19 outbreak in 2QFY21 resulted in overall sales volume declining 8% (nitrile gloves: -2%, NR gloves: -13%). Additionally, Top Glove also incurred higher raw material costs (nitrile: +63%, natural latex: +16%). However, these factors was more than offset by higher ASPs (nitrile gloves: +30%, NR gloves: +14%), which resulted in revenue and core PATAMI rising +12.7% and +20.7% respectively.

YoY. Revenue rose (+336.3%) on the back of stronger ASPs (nitrile gloves: +380%, NR gloves: 216%) and sales volume (nitrile gloves: +17%, NR gloves: +19%). Core PATAMI skyrocketed 24.7x to RM2.9bn in tandem with higher top line. This was achieved despite higher raw material cost (nitrile: +114%, NR latex: +35%) which was due to shortages in supply in the market.

YTD. Revenue grew 315.5% of the back of higher sales volume (+25.5%) (nitrile gloves: +16.3%, NR powdered gloves: +15.3%, NR powder free: +56.8%) and ASPs (nitrile gloves: +326%, NR powdered gloves: +184%, NR powder free: +189%). Increased demand was due to the Covid-19 pandemic causing governments and institutions frantically purchasing gloves for Covid-19 testing as well as vaccine roll out. Despite higher costs (nitrile: +67.7%, NR latex: +26.4%), this was significantly offset by topline increase, resulting to core PATAMI surging by 22.8x.

Outlook. Heading into 3QFY21, Top Glove have guided that they expect nitrile glove ASPs to decline by 3-5% in line with shorter lead time of 170 days (from 560 days in Jan-21). Note that 170 days is still relatively long, as pre-pandemic length was 30-40 days. Despite this, note that Top Glove’s nitrile ASPs would still be significantly higher than their peers, as it had increased prices more aggressively in previous quarters. However, Top Glove shared that NR latex glove prices are still inching up by low single digits. In terms of sales volumes, barring any further Covid-19 outbreaks, we expect volumes to rebound >10% QoQ in 3QFY21 due to factories returning to full production. In terms of capacity expansion, Top Glove expects to add ~18bn pieces bringing its total installed capacity to ~111bn pieces by end-CY21 (+19% YoY), with further plans to aggressively increase capacity to 205bn by end-CY24 (Figure #2).

Forecast. Unchanged, as the Results Were Inline.

Maintain BUY, TP: RM8.14. We maintain BUY with a marginally higher TP of RM8.14 (from RM8.06) after adjusting for balance sheet items. We value Top Glove using their pre-pandemic 5-year average PE multiple of 23x (CY15-19) tagged to sustainable earnings in a post-supernormal earnings environment (FY23) summed with free cash flows generated during the boom period (both discounted back to PV).

Source: Hong Leong Investment Bank Research - 16 Mar 2021