Top Glove’s earnings to remain strong in 1Q21

For 4Q20, the glovemaker reported an 18 times higher net profit of RM1.3b against RM74.2m posted in 4Q19


TOP Glove Corp Bhd’s earnings for the first quarter of the financial year 2021 (1QFY21) is expected to remain strong, driven by global demand for rubber gloves, stable average selling prices (ASPs) and increased glove capacity expansion.

AmInvestment Bank Bhd analyst Thong Pak Leng said the research firm maintains FY21-FY23 net profit forecasts at RM6.5 billion, RM2.3 billion and RM2.2 billion respectively.

“I think the ASP is about the peak now. Although demand for gloves remains strong, new capacity is coming in (Top Glove and other players) 2021, ASP may be eased then,” he told The Malaysian Reserve.

For the fourth quarter ended on Aug 31, 2020 (4Q20), the glovemaker reported an 18 times higher net profit of RM1.29 billion against RM74.17 million posted in the same period last year.

Its earnings per share surged to 15.95 sen versus 0.97 sen previously. Top Glove will be releasing its 1Q financial results for FY21 tomorrow. Leng added that the potential legal action facing the glovemaker will not impact its earnings forecast, although it might have an impact on its price-to-earnings ratio (PER).

On Dec 1, the Department of Labour of Peninsular Malaysia announced it will take legal action against several companies, including Top Glove, after the discovery of squalid housing conditions for its migrant labourers.

The move came after enforcement operations were carried out on Top Glove’s operations in Perak, Kedah, Kelantan, Negri Sembilan and Johor.

The companies will be prosecuted in court for breaching the Minimum Standards of Housing, Accommodation and Employee Facilities Act 1990 (Act 446).

If convicted, they can be punished with a fine of up to RM50,000 for each offence.

“But the latest development could potentially raise the perceived risk premium to Top Glove, hence reducing its PER valuation to 25 times from 28 times.

“With the 25x PER, we arrive at a lower fair value of RM7.03 per share (previously RM7.88) based on the calendar year 2022 earnings per share,” noted AmInvestment in its recent note.

JF Apex Securities Bhd revised upwards its FY21 net earnings forecasts for Top Glove by 74% to RM4.7 billion but lowered FY22 by 7.7% to RM1.3 billion.

“This is based on expectations of better profit margin and higher ASP (+30%) assumption for FY21.

“However, the slight earnings cut for FY22 is due to our belief that the ASP momentum is likely to taper off in the second half of 2021 on the back of rising competition coupled with massive adoption of vaccines as well as elevated raw material prices,” it said in a note.

Overall, JF Apex envisages Top Glove’s net earnings to grow strongly,147.7% year-on-year for FY21 before normalising in FY22.

Despite the bumper year the company enjoyed this year, amid the Covid-19 pandemic, Top Glove also came under heavy scrutiny for its labour welfare recently.

On July 15, US Customs and Border Protection (CBP) agency placed a detention order on disposable gloves manufactured by two of its subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd over forced labour concerns.

While the group is still engaging with the US’ CBP to lift the Withhold Release Order, the Teratai cluster linked to its workers prompted the government to order Top Glove to shut down its 28 factories in stages.

Hence, the glovemaker is expecting delays in some deliveries by about two to four weeks, and also estimates a possible 3% impact on projected annual sales for the FY21.

Top Glove’s share price closed down five sen or 0.75% at RM6.60 yesterday, bringing a market capitalisation of RM54.1 billion.