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Top Glove Corp GLOVE TOP GLOVE CORP (TOPG MK EQUITY, TPGC.KL) 10 Dec 2020 1QFY21 net profit surges twentyfold Company report HOLD Thong Pak Leng (Maintained) [email protected] 03-2036 2025 Rationale for report: Company results/update Investment Highlights Price RM6.84 Fair Value RM7.07 52-week High/Low RM9.77/RM1.44 We maintain our HOLD recommendation for Top Glove with an unchanged fair value of RM7.07. Our valuation is based on CY22 Key Changes EPS over its 5-year average PER of 28x. We raise our FY21F Fair value earnings forecast by 21% to RM7.9bil by increasing our average EPS selling price (ASP) assumption to US$80/1,000 pcs while reducing average utilisation rate to 70% from 80%. We make no YE to Aug FY20 FY21F FY22F FY23F changes to our FY22–23F numbers. Revenue (RM mil) 7,236.3 25,597.1 10,547.9 9,467.4 Top Glove’ s 1QFY21 net profit of RM2,375.8mil came in above Core net profit (RM mil) 1,890.6 7,920.3 2,711.8 1,523.4 expectations at 38% and 28% of our and consensus full-year FD Core EPS (sen) 23.1 96.8 33.1 18.6 estimate. 1QFY21 revenue profit leapt by 293.6% YoY attributed FD Core EPS growth (%) 4.2 3.2 (0.7) (0.4) to the strong demand for gloves in both developing and Consensus Net Profit (RM mil) - 8,614.1 3,450.5 2,488.9 emerging markets, owing to the ongoing global pandemic. At DPS (sen) 12.0 48.0 17.0 9.0 the same time, sales quantity increased by 34% for the same PE (x) 29.6 7.1 20.6 36.8 period. Net profit surged twentyfold on the back of stronger EV/EBITDA (x) 21.3 5.1 13.2 21.2 sales output, high utilisation levels and higher ASP. Div yield (%) 1.8% 7.0% 2.5% 1.3% ROE (%) 42.9% 95.7% 24.8% 12.7% Top Glove has allocated 30% of its capacity for spot orders. Net Gearing (%) Net cash Net cash Net cash Net cash Spot orders for nitrile glove have been fully sold for the next 3 months. At the same time, spot orders for natural rubber Stock and Financial Data powder -free gloves are also increasing due to the long lead time of nitr ile gloves. Shares Outstanding (million) 8,018.71 Market Cap (RM mil) 54,848.0 Management noted that demand will continue to outstrip supply Book Value (RM/share) 0.8 for the next few years with a structural step-up in demand where P/BV (x) 9.1 glove demand is expected to grow 12–15% per annum. ROE (%) 40.28 Presently, Top Glove has a total production capacity of 90bil Net Gearing (%) Net cash pieces per annum. The company has allocated a capex of RM10bil over the next 5 years to double its current capacity by Major Shareholders Tan Sri Dr Lim Wee Chai 26.1% the end of 2025. This will be done in stages whereby 14bil pieces Firstway United Corp 6.9% will be added in FY21 and 16bil in FY22. EPF 5.6% Free Float 61.0% Meanwhile, massive expansion plan by glove companies in Avg Daily Value (RM mil) 492.51 Malaysia and Thailand will provide additional 120bil (+55%) pcs per annum of glove by end of 2022. We believe a short-term Price performance 3mth 6mth 12mth supply excess may come back into play in 2022. Absolute (%) (8.5) 28.9 383.1 We believe that recent progresses in vaccines formation will Relative (%) (23.8) (15.3) 354.5 affect the ASP of gloves as the urgency of glove orders would be reduced post pandemic. Nonetheless, we hold the view that 10.00 1,800 demand for gloves will remain stable post-Covid-19 due wider 9.00 adoption of gloves usage from non-medical industries such as 8.00 1,700 F&B, services, retail etc. 7.00 1,600 6.00 We raise our FY21F earnings forecast by 21% to RM7.9bil by 5.00 1,500 increasing our average selling price (ASP) assumption to 4.00 US$80/1,000 pcs while reducing average utilisation rate to 70% 3.00 1,400 from 80%. We increase our FY21 ASP assumption following 2.00 1,300 1.00 management’s guidance and also the fact that spot price has 0.00 1,200 reached as high as US$150-180/1,000 pcs in recent months while the reduction in utilisation rate is to reflect the temporary Jun-20 Jun-19 Sep-20 Sep-19 Dec-20 Dec-19 Dec-18 Mar-20 Mar-19 closure of some factories due to Covid-19 screening and TOPG MK Equity FBMKLCI Index quarantine for its workers. Top Glove Corp 10 Dec 2020 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. EXHIBIT 1: EARNINGS SUMMARY YE to Aug 1QFY20 2QFY20 3QFY20 4QFY20 1QFY21 QoQ % YoY % 1QFY20 1QFY21 YTD % Revenue 1,209.1 1,229.8 1,688.3 3,109.1 4,759.3 53.1% 293.6% 1,209.1 4,759.3 293.6% EBIT 139.9 148.2 420.0 1,647.8 3,096.3 87.9% 2113.9% 139.9 3,096.3 2113.9% Pretax profit 125.5 130.4 422.0 1,647.2 3,095.5 87.9% 2367.5% 125.5 3,095.5 2367.5% Taxation (13.7) (14.4) (72.0) (297.5) (690.3) 132.0% 4940.8% (13.7) (690.3) 4940.8% Minority Interest (0.3) (0.3) (2.1) (34.0) (16.5) -51.4% 4897.3% (0.3) (16.5) 4897.3% Net Profit 111.4 115.7 347.9 1,315.6 2,388.6 81.6% 2043.7% 111.4 2,388.6 2043.7% Core Net Profit 111.8 116.0 350.0 1,349.6 2,375.8 76.0% 2025.8% 111.8 2,375.8 2025.8% Core EPS (sen) 1.4 1.4 4.2 16.1 29.2 81.6% 2043.7% 1.4 29.2 2043.7% Net gearing (x) 0.9 0.2 net cash net cash net cash 0.9 net cash EBIT margin (%) 11.6% 12.1% 24.9% 53.0% 65.1% 11.6% 65.1% PBT margin (%) 10.4% 10.6% 25.0% 53.0% 65.0% 10.4% 65.0% Net profit margin (%) 9.2% 9.4% 20.6% 42.3% 50.2% 9.2% 50.2% Effective tax rate (%) 10.9% 11.0% 17.1% 18.1% 22.3% 10.9% 22.3% Source: AmInvestment Bank Bhd, Company AmInvestment Bank Bhd 2 Top Glove Corp 10 Dec 2020 EXHIBIT 2: FINANCIAL DATA Income Statement (RMmil, YE 31 Aug) FY19 FY20 FY21F FY22F FY23F Revenue 4,801.1 7,236.3 20,396.3 9,800.3 10,233.5 EBITDA 702.0 2,577.4 8,828.2 3,440.0 3,360.4 Depreciation/Amortisation (206.8) (221.5) (257.2) (317.5) (378.4) Operating income (EBIT) 495.3 2,355.9 8,571.1 3,122.6 2,982.0 Other income & associates (2.7) (1.4) (1.6) (1.7) (1.9) Net interest (69.0) (29.4) (56.2) (59.6) (63.2) Exceptional items 0.0 0.0 0.0 0.0 0.0 Pretax profit 423.6 2,325.0 8,513.3 3,061.2 2,916.9 Taxation (56.0) (397.6) (1,872.9) (673.5) (641.7) Minority interests (2.9) (36.8) (134.7) (48.5) (46.2) Net profit 364.7 1,890.6 6,505.6 2,339.3 2,229.0 Core net profit 364.7 1,890.6 6,505.6 2,339.3 2,229.0 Balance Sheet (RMmil, YE 31 Aug) PPE 2,480.0 3,034.8 3,977.6 4,872.2 5,717.9 Intangible assets 1,256.4 1,012.3 1,042.7 1,074.0 1,106.2 Other long-term assets 413.1 364.3 374.9 385.8 397.1 Total non-current assets 4,149.5 4,411.4 5,395.2 6,332.0 7,221.2 Cash & equivalent 165.8 1,210.4 1,575.2 3,451.5 3,767.1 Inventories 629.9 525.6 1,676.4 805.5 841.1 Trade receivables 592.2 803.1 2,514.6 1,208.3 1,261.7 Other current assets 150.8 1,722.5 1,809.6 1,739.4 1,742.3 Total current assets 1,538.7 4,261.6 7,575.8 7,204.8 7,612.2 Trade payables 492.4 670.7 1,711.2 957.6 1,037.9 Short-term borrowings 1,041.3 323.3 190.3 214.2 235.8 Other current liabilities 58.1 984.8 1,144.2 1,239.6 1,344.6 Total current liabilities 1,591.8 1,978.8 3,045.7 2,411.4 2,618.3 Long-term borrowings 1,379.4 217.4 224.0 230.7 237.6 Other long-term liabilities 162.9 167.0 160.6 160.6 160.6 Total long-term liabilities 1,542.3 384.5 384.6 391.3 398.2 Shareholders’ funds 2,537.0 6,284.1 9,515.2 10,708.4 11,791.3 Minority interests 17.2 25.6 25.6 25.6 25.6 BV/share (RM) 0.31 0.77 1.17 1.31 1.44 Cash Flow (RMmil, YE 31 Aug) Pretax profit 423.6 2,325.0 8,513.3 3,061.2 2,916.9 Depreciation/Amortisation 206.8 221.5 257.2 317.5 378.4 Net change in working capital 63.5 (573.3) (1,749.5) 1,589.3 93.3 Others (167.7) 1,198.0 (1,982.3) 1,153.2 (373.6) Cash flow from operations 526.2 3,171.3 5,038.6 6,121.2 3,015.0 Capital expenditure (623.7) (765.2) (1,200.0) (1,212.0) (1,224.1) Net investments & sale of fixed assets 0.0 0.0 0.0 0.0 0.0 Others 130.2 (1,317.8) 292.9 (41.0) (42.2) Cash flow from investing (493.5) (2,083.0) (907.1) (1,253.0) (1,266.3) Debt raised/(repaid) (643.9) (1,115.0) (37.6) (37.6) (37.6) Equity raised/(repaid) 829.0 178.1 0.0 0.0 0.0 Dividends paid (200.4) (982.4) (3,274.5) (1,146.1) (1,146.1) Others (19.2) 1,875.6 (453.7) (1,808.1) (249.4) Cash flow from financing (34.6) (43.7) (3,765.8) (2,991.8) (1,433.1) Net cash flow (1.8) 1,044.6 365.7 1,876.3 315.6 Adjustments 2.8 0.0 0.0 0.0 0.0 Net cash/(debt) b/f 163.9 164.9 1,209.5 1,575.2 3,451.5 Net cash/(debt) c/f 164.9 1,209.5 1,575.2 3,451.5 3,767.1 Key Ratios (YE 31 Aug) Revenue growth (%) 13.9% 50.7% 181.9% -52.0% 4.4% EBITDA growth (%) -1.3% 267.1% 242.5% -61.0% -2.3% Pretax margin (%) 8.8% 32.1% 41.7% 31.2% 28.5% Net profit margin (%) 7.6% 26.1% 31.9% 23.9% 21.8% Interest cover (x) 7.2 80.1 152.4 52.4 47.2 Effective tax rate (%) 13.2% 17.1% 22.0% 22.0% 22.0% Dividend payout (%) 55.0% 52.0% 50.3% 49.0% 51.4% Receivable turnover (days) 47.1 35.2 29.7 69.3 44.0 Inventory turnover (days) 43.3 29.1 19.7 46.2 29.4 Payable turnover (days) 37.7 29.3 21.3 49.7 35.6 Source: Company, AmInvestment Bank Bhd estimates AmInvestment Bank Bhd 3 Top Glove Corp 10 Dec 2020 DISCLOSURE AND DISCLAIMER This report is prepared for information purposes only and it is issued by AmInvestment Bank Berhad (“AmInvestment”) without regard to your individual financial circumstances and objectives.
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