Top Glove - Record-Breaking Profits Likely In FY21
CGS-CIMB Research - 9^th June

Our channel checks with Top Glove reveal that it is pricing in higher ASPs due to the current strong demand and longer-than-expected order book visibility.
We expect Top Glove to post a record FY21 net profit of RM3.7bn, backed by aggressive ASP growth (+35% y-o-y) and higher sales volume (+25.6% y-o-y).
Reiterate ADD, with a higher Target Price of RM25.00 (S$8.30) (22x CY21 P/E).
 

Widening Lead Time A Sign Of Stronger-Than-Expected Glove Demand
&bull                       Top Glove (SGX:BVA) says that its order lead time further extended at end-May 2020 by > 12 months to up to Jul 21 (from 10 months at end-Apr 20). This is on the back of higher demand from both developed (70% of global glove consumption) as well as developing countries.
&bull                       We expect Top Glove to continue to see higher demand for gloves as the Covid-19 pandemic worsens, especially in countries with high population density and low glove consumption per capita, such as Brazil, Indonesia, Pakistan, etc.
 
Higher Blended ASPs Due To Increase In Prices Of Ad-Hoc Orders
&bull                       Given the long lead time for glove orders, Top Glove has seen an increase in ad-hoc orders. These orders are from customers that urgently need supply of gloves and who are willing to pay substantially higher selling prices (potentially 2-3x of ASPs for recurring orders) in order to obtain glove supply faster.
&bull                       Given the strong ad-hoc demand, we gather that Top Glove has currently allocated up to 10% (and potentially more if needed) of its total capacity to cater to these orders.
 
Expect Sequentially Stronger Results From 3QFY20 Onwards
&bull                       Top Glove is set to release its 3QFY8/20 results on 11 June 20 and we believe it recorded > 100% y-o-y and q-o-q increases in 3QFY20 net profit. This was likely driven by higher sales volume and ASPs. However, we believe that 3QFY20 did not capture the full impact of Covid-19 as it only began to hike ASPs aggressively from June 20. Hence, Top Glove should continue to record sequentially stronger results beyond 3QFY20.
 
Lifting Top Glove' s FY20 EPS By 51-189%
&bull                       We raise our FY20-22F EPS by 51-189%, mainly to factor in more aggressive ASP assumptions and higher utilisation rates. Our earnings forecasts assume ASP changes of +15%/+35%/-30% y-o-y in FY20/21/22F on the back of hikes in ASPs for both recurring and ad-hoc orders, which we also expect to increase.
&bull                       Our sensitivity analysis shows that a 1% rise in ASPs will lift our FY20-22F EPS estimate by 5.8-7.6%.
 
Reiterate ADD, With A Higher Target Price Of RM25.00 (S$8.30) (22x CY21 P/E)
&bull                       In tandem with our EPS hike, our Target Price rises to RM25.00, pegged to 22x CY21 P/E, +0.5 s.d. above its 5-year mean. Note that we lower our P/E multiple from 36.8x (+2 s.d. of its 5-year mean) as we believe that its earnings will peak in FY21 and that the high demand is unlikely to sustain going into FY22.
&bull                       We continue to like Top Glove as the key beneficiary of the current favourable supply and demand dynamics in the glove sector due to COVID-19 given it is the largest glove maker globally by capacity (78.7bn pieces p.a. currently).

-----------------------------
Above report for your DD.  Glovers huat.