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Friday, March 27, 2020

Top Glove - Demand Due to Covid-19 Outbreak to Fuel 2H

We dialled into Top Glove’s 2QFY20 conference call and here are some takeaways. Top Glove production lines are uninterrupted during the MCO period as gloves are considered an essential healthcare product, with production lines running at 100%. Stronger demand in 3QFY20 is expected due to Covid-19 outbreak along with improved profitability through higher utilization. We adjust our FY20-22 forecast upwards by +4.6%, +1.1% and +1.4% after factoring in higher utilisation due to Covid-19 and expansion of capacity. Maintain BUY with higher TP of RM7.40 (from RM6.76), as we roll forward our valuation to mid-FY21 earnings pegged to PE multiple of 35x (+1.5SD above mean).

Recap. 1HFY20 revenue stable at RM2.4bn (+0.7% YoY) thanks to sustained volumes (+0.6% YoY), followed by an increase in core PATMI to RM231.3m (+10.1% YoY) due to EIs and lower tax (effective tax rate of 11% vs. 1HFY19: 18%).

Growth in coming quarters. During the SARS outbreak (2003), global demand for gloves showed an increase of c.15.5% while during H1N1 (2009-2010), it increased to c.16%. While Top Glove has not seen a significant increase from Covid-19 in 2QFY20, we expect this to be evident in the coming quarters. As at 2QFY20, utilisation rate is at 86%, and as we understand, the current utilisation rate is more than 95%. This is to ensure all orders are being met specially to combat Covid-19. Currently we understand that Top Glove’s production lines are not affected with the Movement Control Order (MCO) which has extended to 14th April 2020, as gloves are considered an essential healthcare product. Production is running at 100%, as we comprehend the company recently received an exemption to fully staff its production lines. What more, Top Glove is the largest manufacturer in the world, commanding 26% of global market share. Stronger demand in 3QFY20 is expected due to Covid-19 outbreak along with improved profitability through higher utilization.

ASP. YoY, ASP was flattish (-0.1%) due to mixed prices, increased for latex, vinyl and surgical gloves but decline in nitrile gloves. With the expected overwhelming demand for gloves, we expect ASP to exhibit upward pressure as distributors compete for orders.

CSR. Top Glove has donated 3m pieces of gloves to China as part of an initiative by the Malaysian government and Malaysian glovemakers earlier in January 2020. For Malaysian usage, Top Glove is currently committed to donate 2.5m pieces of medical gloves to aid in the fight against the Covid-19 pandemic to various parties; MOH, PDRM, MARGMA, NGOs as well as RM500k cash contribution to MOH.

Outlook. We expect stronger 2HFY20 in view of the ongoing Covid-19 outbreak. The epicentre has moved from China to Europe, whilst cases started to spike in the USA. Thus, demand growth is expected to exceed the traditional 8-10% per annum. Top Glove’s expansion plans are still going as planned, with no expected delays. In 2020, it will add c.8.2bn pieces in capacity (+16.4% YoY). By 2021, it is projected to have 39 factories with 861 production lines (+11.6% YoY).

Forecast. We increase FY20-22 forecast by +4.6%, +1.1% and +1.4% after raising utilisation assumptions to 85% due to Covid-19 outbreak and capacity expansion.

Maintain BUY, with a higher TP of RM7.40 (from RM6.76) as we roll forward our valuation to mid-FY21 EPS, pegged to PE multiple of 35x (+1.5SD above mean). Top Glove is a good hedge against the broader market negatives from Covid-19 and weak ringgit.

Source: Hong Leong Investment Bank Research - 27 Mar 2020

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