Top Glove shares fall ahead of 4Q results

Since the announcement of the ‘Sputnik V’ vaccine on Aug 11, the glovemaker has lost RM15.7b in market value


VOLATILITY in the prices of rubber glovemakers could return in the week ahead as analysts have differing views for the sector amid a sharp correction in prices underway for the sector counters.

While demand and average selling prices (ASPs) continue to remain strong, some analysts believe an exit at current prices is recommended.

Top Glove Corp Bhd’s fourth quarter (4Q) financial results due next Thursday could help pressure prices lower after having reached market saturation according to Macquarie Research analyst Prem Jearajasingam who downgraded Top Glove from ‘Outperform’ to ‘Underperform’ with a revised target price (TP) of RM5.40 from RM10.13 (adjusted for bonus issue).

Although Top Glove expects to remain profitable in the long run, its earnings are unlikely to remain sustainable – pic by TMR FILE

“While we expect strong results and positive commentary around near-term ASP increases to fuel significant consensus upgrades, we believe the financial year 2021 (FY21) earnings peak is unlikely to repeat once the demand-supply equation normalises in the 2H21/1H22 (first half of 2022).

“We would use this upgrade cycle and potential share price spike as an opportunity to take profits.

“While we maintain that long-run price-earnings ratio (PER) multiples should mimic those of the consumer staples at 40 times to 50 times, we believe investors should be ascribing these multiples on long-run earnings, rather than peak earnings,” he said in a note on Wednesday.

At current levels, Jearajasingam said Top Glove’s shares are trading at a lofty 70 times FY23 estimates PER.

Top Glove fell 70 sen or 9.8% to RM6.45 yesterday on heavy volumes and tested a low of RM6.11 in intraday trade. Since the announcement of the “Sputnik V” vaccine by Russia on Aug 11, the glovemaker has lost RM15.7 billion in market value.

Top Glove has begun shares buyback with 16.3 million shares bought from the market in the past two days, its recent exchange filings revealed.

Jearajasingam added that recent discussions with the company and the procurement team at a regional hospital chain confirmed that the glove supply remains very tight and ASPs continue to rise.

“We understand that ASP increases of 15%-20% per month are still the order of the day till November. We expect the upcoming flu season in the Northern Hemisphere will be an added boost.

“Interestingly, medical professionals we spoke to suggest the opening up of borders will fuel demand for gloves as each traveller tested will require gloves.

“Against this backdrop, we have modelled in 20%-25% ASP increases for nitrile gloves between September and December 2021 — resulting in a RM10.3 billion profit in FY21,” he said.

Jearajasingam explained that the firm likens the run-up in the glove manufacturer share prices to the move in Malaysian IC packaging companies back in 1999/2000, citing reference to Malaysian Pacific Industries Bhd (MPI) and Unisem (M) Bhd.

This he said, where a multi-year upward profit trajectory coupled with an expansion in multiples in the global tech sector led to a 594% increase in the combined market cap of MPI and Unisem between 1Q99 and 1Q00.

Aggregate earnings peaked in 2Q00 and held until 4Q00 before declining sharply (negative by 2Q01). However, the aggregate market cap declined 76% by 2Q01 from their peak in 1Q00.

He added that despite Top Glove expected to remain profitable in the long run with increased capacity supporting a longer-term earnings level above pre-Covid-19 levels, its earnings are unlikely to remain sustainable.

“The key is when does it happen. Based on the 99/00 tech cycle, we would argue that the decline in share prices will take place once the market has little reason to believe that the ASPs will continue to rise at a faster pace than already factored into analysts’ models,” he said.

Jearajasingam said the firm’s base case assumption is that ASPs rise 20%-25% month-on-month (MoM) in September, October, November and December 2020 before plateauing for six months (1H20) and reverting to 14% above May 2020 levels by October 2021.

While the supply-demand dynamics are certainly positive for ASP trends, he said industry players are very clear that when prices start to ease, they will revert to pre-Covid-19 levels very quickly.

High glove prices are not a new phenomenon according to Macquarie. In the 90’s, glove prices were above US$60 (RM249.60) per thousand pieces due to less efficient production processes and higher latex contents.

“In 1991, prices did spike due to a severe shortage but came crashing back just as quickly — supporting our ASP trend assumptions above,” he said.

Top Glove has eked out higher capacities from its existing lines by speeding up the lines and increased automation.

The company has guided for a capital expenditure of RM1 billion per annum over the coming years to deal with the stronger demand for gloves. Management is looking for 100 billion capacity by August 2021 and 120 billion pieces by 2022, Jearajasingam noted.

“Other manufacturers are likely to do the same, which should alleviate the demand-supply situation by 2022,” he said.

CGS-CIMB Research analyst Walter Aw said owing to the sustained spread of Covid-19, Top Glove continues to witness robust glove demand as its sales lead time for nitrile glove is now more than 20 months until the end-calendar year 2021 (CY21), from 18 months in June 2020.

“Despite increased news on potential discovery of a Covid-19 vaccine, Top Gloves believes glove usage globally will remain strong even in the event of a discovery of a Covid-19 vaccine, mainly due to increasing healthcare and hygiene awareness in developing countries and increased usage in both medical and non-medical sectors,” he said in a note on Tuesday.

Aw added that Top Glove expects further ASP increases for nitrile gloves at 20% MoM in September and October 2020 and potentially another 10% MoM on November 2020.

Top Glove also sees ASPs for latex gloves increasing 5% MoM in September and October 2020.

“This is also supported by Top Glove recently receiving more spot orders until end-CY20 forecast (CY20F) as it expects to allocate up to 30% (from 20%-25% previously) of its total capacity for spot orders going forward,” he said.

Aw noted that the firm gathered that Top Glove has recently seen shortages in the supply of nitrile butadiene (NBR), leading to 10%-15% MoM increases in NBR costs. “Top Glove expects NBR supply to remain acute in the near term as new supply is expected to kick-in only by end-CY21F.

“However, Top Glove said it is not overly concerned about this as the quantum of ASP hikes will be more than sufficient to offset the raw material price increases,” he said.

Aw maintained an ‘Add’ call on Top Glove with an unchanged TP of RM9.20.