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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Tue, 27 Jul 2021, 9:34 AM

 

Top Glove Corporation - 9MFY21 Below Expectations, But ASP Weakness Reflected in Current Share Price

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9MFY21 PATAMI of RM7262m (+13-fold YoY) came in below expectations at 66%/69% of our/consensus full-year forecasts. The negative variance from our forecast is due to lower-than- expected volume sales and ASP. Hence, we lower our FY21E/FY22E net profit by 15% each to account for lower ASP and volume growth. ASP trend is expected to soften albeit at a slower pace going forward as nitrile lead times have been reduced to between 90 to 120 days from 150 days previously. In our view, subsequent quarters of ASP weakness have already been reflected in the current share price. Reiterate OUTPERFORM with lower TP from RM6.49 to RM5.60 based on 12x CY22 EPS.

QoQ, 3QFY21 revenue fell 22% due to lower ASP (-16%) and volume sales (-4%). Lower QoQ sales volume was due to reduction in sales to the U.S., following a temporary halt in shipments to the U.S. from Malaysia, in compliance with requirements of the U.S. Customs and Border Protection. This brings 3QFY21 PATAMI to RM2,036m (-29%). A 3rd interim and special dividend totalling 18.0 sen was declared, bringing 9MFY21 DPS to 59.7 sen, below our estimate due to the poorer-than-expected results.

YoY, 9MFY21 revenue rose 246% due to higher volume sales (+12%) and ASP (+200%). The improved profit came on the back of higher sales output, coupled with higher average selling prices (ASPs) which peaked in February 2021. This propelled 9MFY21 PATAMI higher by 13-fold.

Outlook. ASP trend is expected to soften albeit at a slower pace going forward as lead times have been reduced to between 90 to 120 days from 150 days previously. Specifically, nitrile ASP is expected to decline 3-5% m-o-m or be adjusted down. In our view, the share price weakness is reflecting subsequent quarters of ASP weakness ahead. Looking ahead into 4QFY21, the group expect volume sales to improve QoQ by 10-20%. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. Although sentiment on the sector is diminishing, lead times suggest that CY22 demand will remain strong, from increased demand brought by heightened hygiene awareness extending beyond the healthcare community. According to Malaysian Rubber Glove Manufacturers Association, the demand for rubber gloves will last beyond 1Q 2022 with growth rate averaging between 15% and 20% going forward. Plan for the listing in The Stock Exchange of Hong Kong Limited (HKEX) is expected to be delayed from end-2QFY21, while waiting for the US Customs Border to uplift the Withhold Release Order (WRO).

Our FY21E and FY22E net profits are downgraded by 15% each. FY21E net profit lowered due to cutting our volume growth from 18% to 10% and our ASP from USD76 to USD70/1,000 pieces. FY22E net profit lowered by 15% due to lower ASP from USD40 to USD37/1,000 pieces.

Reiterate OP. Correspondingly, we downgrade our TP from RM6.49 to RM5.60 based on 12x CY22E EPS of 46.4 sen (at close to -1.0SD below 5- year forward historical mean). Our target PER is at a 33% discount to normalised 5-year pre-COVID-19 historical forward mean averaging 18x. We believe the share price weakness is reflecting subsequent quarters of ASP weakness ahead and also reflecting ASP moving towards USD35/1,000 pieces. Still, in our view, from the perspective of a long-term investor, we see significant value in Malaysian glove players which command 65-68% of global market share which are consistently evolving and innovating in terms of products and plant modernization via automation.

A key downside risk to our call is lower-than-expected ASP in 2022.

Source: Kenanga Research - 10 Jun 2021

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Labels: TOPGLOV

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TOPGLOV 4.00 -0.10 (2.44%) 23,275,800 

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