Investment Highlights

• We maintain our HOLD recommendation for Top Glove with an unchanged fair value of RM7.07. Our valuation is based on CY22 EPS over its 5-year average PER of 28x. We raise our FY21F earnings forecast by 21% to RM7.9bil by increasing our average selling price (ASP) assumption to US$80/1,000 pcs while reducing average utilisation rate to 70% from 80%. We make no changes to our FY22–23F numbers.
• Top Glove’s 1QFY21 net profit of RM2,375.8mil came in above expectations at 38% and 28% of our and consensus full-year estimate. 1QFY21 revenue profit leapt by 293.6% YoY attributed to the strong demand for gloves in both developing and emerging markets, owing to the ongoing global pandemic. At the same time, sales quantity increased by 34% for the same period. Net profit surged twentyfold on the back of stronger sales output, high utilisation levels and higher ASP.
• Top Glove has allocated 30% of its capacity for spot orders. Spot orders for nitrile glove have been fully sold for the next 3 months. At the same time, spot orders for natural rubber powder-free gloves are also increasing due to the long lead time of nitrile gloves.
• Management noted that demand will continue to outstrip supply for the next few years with a structural step-up in demand where glove demand is expected to grow 12–15% per annum. Presently, Top Glove has a total production capacity of 90bil pieces per annum. The company has allocated a capex of RM10bil over the next 5 years to double its current capacity by the end of 2025. This will be done in stages whereby 14bil pieces will be added in FY21 and 16bil in FY22.
• Meanwhile, massive expansion plan by glove companies in Malaysia and Thailand will provide additional 120bil (+55%) pcs per annum of glove by end of 2022. We believe a short-term supply excess may come back into play in 2022.
• We believe that recent progresses in vaccines formation will affect the ASP of gloves as the urgency of glove orders would be reduced post pandemic. Nonetheless, we hold the view that demand for gloves will remain stable post-Covid-19 due wider adoption of gloves usage from non-medical industries such as F&B, services, retail etc.
• We raise our FY21F earnings forecast by 21% to RM7.9bil by increasing our average selling price (ASP) assumption to US$80/1,000 pcs while reducing average utilisation rate to 70% from 80%. We increase our FY21 ASP assumption following management’s guidance and also the fact that spot price has reached as high as US$150-180/1,000 pcs in recent months while the reduction in utilisation rate is to reflect the temporary closure of some factories due to Covid-19 screening and quarantine for its workers.
• We make no changes to our FY22–23F numbers. Top Glove has recommended a special dividend of 16.5 sen for 1QFY21. Following our FY21 earnings revision, we expect Top Glove to pay dividends of 48 sen for FY21, translating into a yield of 6.9%.
• Our fair value is unchanged at RM7.07 per share based on CY22 EPS over its 5-year average PER of 28x. We believe Top Glove’s fundamentals remain solid for the next few years. Nevertheless, at its current share price, it offers limited upside, hence we maintain our HOLD recommendation, and advise investors to accumulate at lower levels.

Source: AmInvest Research - 10 Dec 2020