KUALA LUMPUR (Jan 5): MIDF Research has cut Top Glove Corp Bhd's target price (TP) to RM8.29 from RM10.96 earlier, despite a surprise extra 20% dividend payout announced yesterday, as it believes that the world's largest glove maker will need time to significantly improve its workers' welfare.

In a note, its analyst Ng Bei Shan said environment, social and governance (ESG) considerations had become increasingly important in sustainable investing.

"The past issues Top Glove encountered had somewhat dampened some of its ESG aspects and we opine that the company may need some time to rectify them. Among others, the company has committed to improving its employees’ accommodation by setting aside its budget to purchase and/or build better housing for them," she wrote.

According to her, the new TP took into consideration "the works that can be done to further improve its employee welfare", and is pegged at an unchanged estimated earnings per share (EPS) of 43.8 sen for the financial year ending Aug 31, 2022 (FY22).

While the new TP is 24.36% lower than the previous one, it still represents a 50.73% premium to its last closing price of RM5.50. The counter, along with the other three big glove stocks, has seen their share prices decline since Oct 5.

"Since the correction of its share price, Top Glove is trading at a PER (price-earnings ratio) of 5.3 times FY21E earnings and 12.5 times FY22F earnings, which makes its valuation attractive for a large cap. The sweetener is the bumper dividend for FY21E with an estimated yield of 12.5%," she said.

Ng still maintained her "buy" call for the stock, and raised her dividend per share (DPS) assumption to 69 sen from 55 sen for FY21 in light of the higher dividend payout ratio.

"We believe that Top Glove will still be able to fulfil its capital requirements even with the higher payout ratio, considering its improving operating cash flow. This translates into a dividend yield of 12.5% for FY21E. That said, we maintain our FY22F payout assumption of 50% and DPS of 22 sen, which implies a decent yield of 4%," she said.

She also noted that while sentiment on glove stocks had turned bearish owing to progress in Covid-19 vaccination roll-out plans, channel checks revealed that demand for gloves remained strong, shoring up their average selling prices (ASPs).

"Delivery time for nitrile gloves is expected to be more than one year. All things considered, we believe that Top Glove is on track to deliver record results for FY21E," she said.