Top Glove’s best yet to come, but analysts cautious

The glove manufacturer is slowly increasing its production capacity and hopes to reach 100.4b pieces by the end of FY21


TOP Glove Corp Bhd’s record third-quarter (3Q) results last week, the best in the glovemaker’s 29-year history, was driven by stronger sales and prices.

The upsides also helped its share price gains but analysts warned much of the positives from the Covid-19 pandemic had been priced in by the market.

Top Glove’s net profit in 3Q ended May 31, 2020, surged 365.93% year-on-year (YoY) to RM347.89 million or 13.59 sen earnings per share (EPS).

Nine-month earnings surged 95% YoY to RM575 million or 22.47 sen EPS as the company benefitted from higher sales and pricing power.

Third-quarter revenue rose 41.85% YoY to a historic quarterly high of RM1.69 billion as customers, new and old, sought its glove products range.

As such the world’s largest manufacturer of gloves is slowly increasing its production capacity and hopes to reach 100.4 billion pieces by the end of the next financial year (FY21), as demand for gloves is expected to remain positive even if Covid-19 vaccines are found.

Public Investment Bank Bhd (PublicInvest Research) analyst Chua Siu Li believes Top Glove will continue to record supernormal profits in the coming quarter given its order lead time for latex and nitrile gloves has reached circa 400 days and the average selling price (ASP) for its gloves continues to rise due to a global shortage.

“While we expect raw material prices to start trending higher going forward, we reckon the quantum of ASP increase should be sufficient to account for the rising raw material cost,” she stated in a report last Friday.

Chua added that Top Glove indicated new capacity coming on stream will cater to ad-hoc orders, which are generally priced at a 100%-150% premium compared to the usual recurring orders.

The investment bank has raised its earnings forecast for Top Glove’s FY20-FY21F by 35%-160%.

While PublicInvest Research does not discount Top Glove as capable of delivering record-breaking profits, the firm believes the exceptionally strong 3Q results are not sustainable in the long run.

“We deem it is unjustified to continue valuing Top Glove at 43 times price earnings (PE). In that regard, we are cutting our PE multiple on Top Glove to 31 times,” Chua said.

The bank is taking a more cautious stance on Top Glove as its share price has rallied circa 180% since its last upgrade in end-January.

“The risk reward ratio has turned less favourable for investors currently,” Chua said.

Thus, PublicInvest Research has downgraded its call on Top Glove to ‘Neutral’ from ‘Outperform’, with a higher target price (TP) of RM19.30.

MIDF Amanah Investment Bank Bhd too believes the positive earnings outlook for Top Glove has been largely priced in.

It has downgraded the counter to ‘Neutral’ from ‘Buy’ with a revised TP of RM17.30.

RHB Investment Bank Bhd (RHB Research) analyst Alan Lim believes the earnings growth has more legs and expects Top Glove’s 4Q earnings to be better than the 3Q results.

“As the lead time has increased 10-fold, the 5% ASP increase in 3Q should only be the beginning. As the company will focus on allocating more of its production capacity to cater for spot orders that fetch a much higher price, we estimate 4Q ASP should increase further,” he said.

RHB Research has maintained a ‘Buy’ call on Top Glove with a TP of RM20.50 and has increased its FY20-FY22F earnings by 18%-26% on increasing ASP and sales volume assumptions.

“We expect Top Glove’s 4Q net profit to be much better quarter-on-quarter, even though 3Q is already a record high due to the ASP increase.

“In the long run, Top Glove is a beneficiary of the long-term uptrend of gloves consumption globally at 8%-10% annually (even without Covid-19),” he said.

AmInvestment Bank Bhd analyst Nafisah Azmi also expects sequential improvement in Top Glove’s profitability driven by higher demand, increased capacity expansion and cheaper raw material prices.

The firm has maintained a ‘Buy’ call on Top Glove, but with a higher fair value of RM20.06 per share versus RM17.38 previously.

Top Glove’s shares closed 1.2% or 20 sen higher to RM16.90 last Friday valuing the glove manufacturer at RM44.82 billion.

Its share price has tripled since the start of the year and has emerged the best performing stock on the FTSE Bursa Malaysia (FBM) KLCI benchmark.