• Top Glove's 1QFY21 earnings boosted by higher volume and ASP.
• Higher ASP more than offset increase in raw material costs; declares bumper dividend.
• Expect Top Glove's earnings to stay robust in the coming quarters as demand remains strong.
• Maintain BUY with higher target price.

Top Glove's Record-high 1QFY21 Revenue and Net Profit Above Expectations

• Top Glove (SGX:BVA) registered another record net profit of RM2.4bn in 1QFY21 (+2,032.2% y-o-y; +83.9% q-o-q). The stellar results, above our and consensus expectations, were driven by stronger sales volume and ASP.
• Top Glove declared a first single-tier dividend per share (DPS) of 16.5 sen in 1QFY21. Payout ratio is at 56% which includes a 6% payout as special dividend.
• Top Glove's 1QFY21 revenue came in at RM4.8bn (+293.6% y-o-y, +53.1% q-o-q), supported by higher sales volume (+34.0% y-o-y, -0.4% q-o-q) and higher blended ASP (+203.9% y-o-y, +58.3% q-o-q). The quantum of net profit improvement was greater than revenue growth as a high utilisation rate had amplified production efficiency.

Aspion’s Performance Continued to Improve

• Top Glove’s subsidiary Aspion Sdn Bhd continued to contribute positively to group earnings. It registered a profit before tax (PAT) of RM332m in 1QFY21vs RM6.3m in 1QFY20. The strong results were supported by a higher production utilisation rate of 80% (vs 60% in FY19) and increase in ASP.

Stronger EBIT/k Gloves

• Earnings before interest and taxes (EBIT)/k gloves came in at RM171.56 (+1,545.8% y-o-y, +91.5% 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 an optimal utilisation rate leading to economies of scale.

Average Selling Price of Gloves Expected to Increase in the Near Term

• Nitrile glove ASP is expected to increase at a stronger quantum compared to NR glove ASP due to the shortage of nitrile gloves in the market. Blended ASP is expected to increase 30% q-o-q which will result in better earnings in 2QFY21.
• Utilisation rate is expected to stay high at close to 100% vs 85% pre-COVID-19.

Strong Global Demand for Gloves Expected in 2021 and 2022

• Top Glove’s management expects 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. The stronger glove demand growth in 2021 is expected to be mainly driven by the COVID-19 pandemic.
• Post-pandemic growth is projected to be higher than pre-pandemic growth due to heightened awareness in the medical and non-medical sectors. Annual demand growth is expected to be 15% y-o-y post-pandemic.

Accelerating Capacity Expansion

• In Top Glove’s latest update, its total installed capacity stands at 90bn pieces of gloves. Its management has revised the company’s planned capacity expansion upwards for CY20 and CY21 to capture the robust demand. Currently, it is targeting to increase capacity to 108bn pieces by the end of December 2021 and to 129bn pieces by the end of December 2022.
• Top Glove is setting up its first glove factory in Vietnam. The initial production capacity of approximately 2.8bn pieces from 10 production lines is expected to come on stream in October, while the second phase of capacity expansion of 2.4bn pieces is likely to commercialise in 3QCY21. The rationale of setting up the manufacturing plant in Vietnam is to diversify geographical exposure and enjoy a 7% tax rebate.

Order Book Backlog of More Than a Year

• Currently, its order book backlog for nitrile gloves is at 510 days from 620 days in September. NR gloves order book backlog has also been reduced to 340 days from 400 days as some of the nitrile glove production switched to the NR glove production line due to shortage of nitrile rubber raw materials.
• Top Glove has allocated 30% of production capacity for spot orders.

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 77bn pieces of gloves to 185.5bn by FY26. The capex will also be utilised for 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 target is RM1.9bn.

Improving Workers Accommodation

• Efforts to source for more worker accommodation and to improve existing accommodation have been ongoing in consideration of the large number of workers, for which the Group has already invested RM70m. In addition, Top Glove has spent some RM20m on purchasing 100 units of apartments over the past two months and is also renting more houses for its workers.
• In the mid-term, Top Glove has earmarked approximately RM100m to be invested in workers’ facilities and accommodation, which includes building mega hostels in Selangor (Klang and Banting) with a combined capacity of 7,300 pax and are fully equipped with a suite of amenities and facilities. The CAPEX for the new mega hostels is around RM70m and the hostels are expected to be ready by 2022.
• Top Glove is also building and acquiring additional houses, apartments and hostels in other states where it has operations.
• On the update on the current situation in the Teratai cluster, all 28 glove manufacturing plants in Meru is expected to resume operations within the next two to three weeks.

Work Towards Upliftment in Ban

• Top Glove continues to actively engage with the U.S. Customs Border and Protection towards the expeditious upliftment of the Withhold Release Order (WRO), for which it is making good progress.

Top Glove - Valuation & Recommendation

• Re-iterate BUY on Top Glove with higher target price. We raised our FY21-22 net profit assumptions to factor in higher ASPs and revised the installed capacity as per management guidance. We also increased our target price from RM10.20 to RM10.40 post-earnings adjustment with updated price-to-earnings (PE) of 12x CY21F EPS (from 19x previously). This is based on its 5-year mean. We reduced our target multiple given the projected supernormal profits in FY21F.
• While there have been reports that COVID-19 vaccines could be ready by 4Q20-1Q21, the timeline for sufficiently accessible vaccines that would allow for global containment of the pandemic remains to be seen. Even if a vaccine is developed by the beginning of 2021, manufacturing billions of doses will take time.
• In the longer term, even as infection rates ease, we expect COVID-19 to drive increased usage of gloves globally, sustaining a “new normal” of demand.

Source: DBS Research - 10 Dec 2020