RHB Investment Bank projects Top Glove earnings at RM9.46 billion in FY21

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KUALA LUMPUR (Sept 18): RHB Investment Bank has increased its Top Glove Corp Bhd earnings forecasts for financial year 2021 (FY21) and FY22 by 156% and 84% to RM9.46 billion and RM7.26 billion, respectively, assuming that gloves would fetch average selling prices (ASPs) of US$49 to US$61 per 1,000 pieces.

"However, we maintain FY23 forecast earnings of RM4.49 billion, assuming an unchanged long-term ASP of US$37.00 per 1,000 pieces," RHB Investment Bank's analyst Alan Lim said.

"We believe that the long-term ASP should be at the break-even level at which inefficient new entrants should be operating. We expect earnings to see a significant jump in FY21 but decline in FY22 and FY23. Earnings growth should resume from FY24 due to volume growth with flat ASP," he said in a research note today.

Top Glove's net profit soared 417% year-on-year in FY20 to RM1.86 billion, while revenue jumped to RM7.23 billion from RM4.8 billion in FY19 as demand for rubber gloves spiked amidst the Covid-19 pandemic.

For the fourth quarter of FY20 (4QFY20), net profit stood at RM1.29 billion, compared with RM74.16 million in 4QFY19, while revenue was RM3.1 billion versus RM1.18 billion previously.

In making the announcement yesterday, Top Glove said FY20's financial results were "an unsurpassed performance in a year like no other, with more upside in glove demand expected", adding that the group was also looking forward to fresh highs in FY21.

MIDF Research said the rubber glove manufacturer's product mix has enabled it to fulfil different requirements from its various customers.

It said due to the limited supply of nitrile butadiene and long lead time for nitrile gloves (nitrile gloves' spot order has been fully taken up for the next three months), some customers have decided to switch to powder-free natural rubber gloves, as well as thermoplastic extruded gloves.

The discount between natural rubber gloves and nitrile gloves is expected to narrow going forward should more customers choose to buy natural rubber gloves.

"On the other hand, the prices of natural rubber have remained fairly stable. Its vinyl glove segment, which is mainly catered for China's market, has also seen a huge increase in ASP. Production activities are going well at its Vietnam plant, with new production lines coming in monthly," it said.

MIDF also believes Top Glove's wide geographical presence enables it to sell to various markets as the number of active cases globally may experience different urgency in demand along the way.

It said high cash level bodes well for expansion plan and brings down financial costs. The company has utilised the deposits from orders to fully pay off its syndicated loans amounting to RM654 million. It has also converted 87% of its convertible bonds of RM710 million to ordinary shares.

Its net cash of RM2.3 billion as of end-August enables it to fund its expansion plans and dividend payout. Out of the cash pile, it has earmarked RM1.9 billion for capital expenditure, which includes 13 double former lines and three single former lines for calendar year 2020 (CY20) and 56 double former lines in CY21.

Both of which will add another 19 billion pieces of gloves to its capacity.

Following the upbeat outlook, RHB Investment Bank and MIDF both make a "buy" call for Top Glove.

However, despite making a "buy" call, RHB Investment said it lowers its target price (TP) for Top Glove to RM9.50 as it reduces the long-term terminal growth to 1% from 3% previously.

"We believe that the higher-than-expected hike in ASP will encourage new entrants into the glove sector, hence, the long-term-growth assumption has been lowered for Top Glove."

MIDF, on the other hand, increases its TP to RM9.63 from RM9.31.

"We think the premium is justified for its leading position, market share, and business upcycle. We think that demand for gloves is likely to remain strong in the coming quarters due to an unabated number of active cases and higher hygiene awareness.

"We also like Top Glove for its product and geographical diversification, which allows it to mitigate any potential business risks in any particular market or product segment," it added.

At 9.18am, Top Glove rose 26 sen to RM8.05 with a total of 18.55 million shares traded.