Analysts remain positive on Top Glove, deems it ' undervalued at current prices'

 

Analysts from CGS-CIMB and UOB Kay Hian are recommending investors accumulate on Top Glove amid its stellar 1QFY2021 results as well as its Covid-19-related operational setbacks.

 

CGS-CIMB analyst Walter Aw has maintained his add recommendation albeit with a lower target price of RM8.90 ($2.93) from RM10 previously.

  We cut our target price to RM8.90, based on 16x CY2022 price-to-earnings (P/E), -0.5 standard deviation (s.d.) of its 5-year mean (previously 17x P/E), he writes in a Dec 9 report.

 

& ldquo The lower P/E is to account for ongoing concerns on ESG-related issues, particularly related to its foreign workers. Nevertheless, we still like Top Glove as it is the key beneficiary of higher glove demand due to the Covid-19 pandemic, given its position as the world& rsquo s largest glove maker, he says.

 

Top Glove, on Dec 9, posted earnings for 1QFY2021 of RM2.38 billion or core net profit of RM2.6 billion, up 2,198% y-o-y.

 

This, says Aw, is in line with the brokerage full-year estimates, and above Bloomberg consensus estimates of 29.7%.

 

In 1QFY2021, Top Glove declared its first interim dividend of 16.5 sen per share. This represents 56% payout (50% usual dividend policy + 6% special), i.e. above our expectations, he says.

 

The company also registered higher sales volume and a hike in average selling prices (ASPs) due to Covid-19, which led to stronger q-o-q results.

 

1QFY2021 revenue rose by 53.1% q-o-q and net profit by 83.9% q-o-q. This was thanks to higher ASPs (+57% q-o-q), which more than offset a weaker US$/RM (-2% q-o-q) and rise in raw material prices (nitrile latex: +39% q-o-q, natural rubber: +13% q-o-q), notes Aw.

 

We understand that 1QFY2021 sales volume was flattish on a q-o-q basis, given the impact of the first two weeks of the enhanced movement control order (EMCO) on all of its Meru, Klang plants (50% of total capacity) that occurred towards end-1QFY2021, he adds.

 

Following the closure of its 28 manufacturing facilities in Meru, Klang, Aw says he expects its Meru plants to be operational on a gradual basis.

 

We gather that TOPG has already commenced operations at seven plants, with plans to recommence operations at seven plants a week for the next three weeks, he says.

Similarly, UOB Kay Hian analyst Phillip Wong has maintained his buy call and target price of RM12.30, as Top Glove prospects remain firmly intact despite the noise generated from the shutdown of its factories due to Covid-19.

 

Like CGS Aw, Wong noted that operations at the company affected production sites in Meru will be gradually resumed over four phases to achieve a utilisation rate of 75% in the second half of December.

 

Based on our estimates, the full impact on FY2021 earnings is close to 3%.
However, we leave our earnings forecasts unchanged as the current ASP trajectory suggests upside to our existing forecasts. However, we will factor it in after we gain further visibility on ASPs post-mass vaccination in 1Q2021, says Wong.

Wong, who attended a conference call with Top Glove management, says the company believes that it is close to resolving the issue of the withhold release order (WRO) issued by the US Customs and Border Protection in July 2020.

 

It could be a matter of weeks before the US CBP lifts its detention order, which would allow Top Glove to fully resume sales to the US.

Due to the WRO, sales volume in 1QFY2021 declined by 2% y-o-y.

 

While the earnings impact is negligible, we think that the lifting of the WRO would improve sentiment as it positively affirms Top Glove labour practices, Wong adds.

Despite the higher costs for nitrile latex, this is well-absorbed by the revision of ASPs.

 

We gather December-January nitrile ASPs would be raised by 15% and 10% m-o-m respectively. This would price nitrile ASPs at US$120/000 pieces in January. There is the expectation that these contracted ASPs could be sustained in 2H2021, followed by 5-10% q-o-q contractions over 2022, says Wong.

 

Based on the trajectory and visibility, there is upside to our existing FY2021/2022 ASP assumptions of 70.1/33.9 (US$/000 pieces) respectively. However, we retain our forecasts at this juncture, awaiting further visibility post-commencement of mass vaccinations, he adds.

 

On the company possible violations of housing standards for workers under new amendments to the Workers Minimum Standards of Housing and Amenities Act 1990 (act 446), Wong sees the penalty exposure as overblown.

 

More importantly, he says, the underlying labour issue is being addressed.

There were misconceptions that the RM50,000 penalty was applicable to each affected worker. However, we gather that the RM50,000 penalty is only applicable to each non-conforming accommodation. Therefore, the possible financial impact is more palatable than initially perceived, he says.

 

More importantly, Top Glove plans to invest RM100 million in new hotels and houses equipped with necessary facilities and amenities to fully comply within the grace period extended by the Human Resource Ministry, he adds.

 

As such, Wong has maintained his earnings forecasts on Top Glove until he has further visibility over ASPs.

 

Our target price is at a significant discount as we believe valuations are being pegged to windfall peak earnings, upside to earnings is increasingly being factored in, and the risk-to-reward at this juncture is increasingly pronounced given the surge in share price. That said, our P/E peg is reasonable as Top Glove is an established FBMKLCI component index constituent with sublime earnings growth, he says.

* Note that TG is the bellweather for all glove companies in Malaysia.
In fact UG has much higher margin being a OBM manufacturer and carrying a premium Brand.
Its PE is probably the lowest. Deeply oversold counter.