GLOVE TOP GLOVE CORP

(TOPG MK EQUITY, TPGC.KL) 12 Nov 2020 Demand to remain robust post-Covid-19 Company report HOLD

Thong Pak Leng (Maintained) [email protected] 03-2036 2025 Rationale for report: Company update

Price RM7.86 Investment Highlights Fair Value RM7.88 52-week High/Low RM9.77/RM1.44 We maintain our HOLD recommendation for Top Glove with  Key Changes a lower fair value of RM7.88 (previously RM8.40). Our Fair value  valuation is based on the rolled-over CY22 EPS over its 5- EPS  year average PER of 28x. We make no changes to our FY21–

YE to Aug FY20 FY21F FY22F FY23F FY23 net profit forecasts.

Revenue (RM mil) 7,236.3 20,396.3 9,800.3 10,233.5  AmInvestment Bank recently hosted a webinar with Top Core net profit (RM mil) 1,890.6 6,505.6 2,339.3 2,229.0 Glove and institutional investors. Management updated us

FD Core EPS (sen) 23.1 79.5 28.6 27.2 on the group’s latest development and also the its plan post- FD Core EPS growth (%) 4.2 2.4 (0.6) (0.0) Covid-19. Here are the key highlights: Consensus Net Profit (RM mil) - 8,397.3 3,440.6 2,376.6 DPS (sen) 12.0 40.0 14.0 14.0 1) Demand will remain robust post-Covid19. Top Glove expects PE (x) 34.0 9.9 27.5 28.9 the demand for gloves to remain on a positive trend post-Covid- EV/EBITDA (x) 24.6 7.1 17.7 18.1 Div yield (%) 1.5% 5.1% 1.8% 1.8% 19 (Exhibit 1). The main reason is the pandemic has raised much awareness on personal hygiene, resulting in a higher ROE (%) 42.9% 82.4% 23.1% 19.8% Net Gearing (%) Net cash Net cash Net cash Net cash usage of gloves. In developing countries, the usage of gloves is

increasing with a wider adoption of gloves usage from non- Stock and Financial Data medical industries such as F&B, services, retail etc.

Shares Outstanding (million) 8,143.82 2) There may not be an oversupply of gloves post-Covid-19. Market Cap (RM mil) 64,010.5 Management noted that to increase the supply of gloves, there Book Value (RM/share) 0.8 are some key issues that need to be addressed such as: (i) the P/BV (x) 10.2 ROE (%) 42.33 availability of contractors to build production lines; (ii) shortage

Net Gearing (%) Net cash of foreign workers; and (iii) constraint of nitrile raw material.

Major Shareholders Tan Sri Dr Lim Wee Chai 25.7% 3) 30% of capacity for spot orders. Top Glove has allocated

Firstway United Corp 6.8% 30% of its capacity for spot orders. The spot orders for nitrile EPF 6.1% glove have been fully sold for the next 3 months. Meanwhile, Free Float 61.5% the spot orders for natural rubber powder-free gloves are also Avg Daily Value (RM mil) 376.34 increasing due to the long lead time of nitrile gloves.

Price performance 3mth 6mth 12mth 4) Capacity expansion. Presently, Top Glove has a total Absolute (%) (12.3) 228.4 456.9 production capacity of 90bil pieces per annum. The company Relative (%) (11.6) (11.8) 464.8 has allocated a capex of RM10bil over the next 5 years for

capacity expansion (Exhibit 2) to double its current capacity by 11.00 1,900 the end of 2025. This will be done in stages whereby 14bil 10.00 1,800 pieces will be added for FY21 and 16bil for FY22. 9.00 8.00 1,700 7.00 We hold the view that demand for gloves will remain stable 1,600  6.00 post-Covid-19 due to the abovementioned reasons. 5.00 1,500 4.00 However, we expect ASP to decline as there is no longer a 3.00 1,400 rush for gloves compared to what happened at the 2.00 1,300 beginning of the pandemic. We reckon that ASP will stabilise 1.00 0.00 1,200 at a higher level than the pre-pandemic level due to the broader usage of gloves. Jul-17 Jul-18 Jul-19 Jul-20

Nov-16 Nov-17 Nov-18 Nov-19 Nov-20 Mar-17 Mar-18 Mar-19 Mar-20

TOPG MK Equity FBMKLCI Index

Top Glove Corp 12 Nov 2020

 We maintain our view that Top Glove’s net profit will peak in FY21F as demand soars from the Covid-19 pandemic with increased capacity expansions. We make no changes to our FY21–23 net profit forecasts at RM6.5bil, RM2.3bil and RM2.2bil respectively. Our ASP assumptions are US$60/1,000 pcs for FY21, US$35/1,000 pcs for FY22 and US$28/1,000 pcs for FY23 with an average utilisation rate of more than 80%. We roll over our valuations to CY22 and arrive at a lower fair value of RM7.88 per share. 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: DEMAND AND SUPPLY PROJECTION

Source: MARGMA & Company’s estimates

EXHIBIT 2: CAPACITY EXPANSION

Source: Company

AmInvestment Bank Bhd 2 Top Glove Corp 12 Nov 2020

EXHIBIT 3: 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 12 Nov 2020

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