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KUALA LUMPUR (July 13): Kenanga Research has reiterated its “outperform” call for Top Glove Corp Bhd with a higher target price (TP) of RM32, from RM25 previously, based on 21.5 times calendar year 2021 estimated (CY21E) earnings per share (EPS) of 152.3 sen.

In a note today, Kenanga analyst Raymond Choo said this was lower than its previous price-earnings ratio (PER) of 36 times as he believes the valuations are pegged to supernormal earnings, and the upside to peak earnings should have been factored in.

However, he also raised the glove maker’s estimated net profit for the financial year ending Aug 31, 2020 (FY20E) and FY21E by 16% and 120% respectively to RM1.4 billion and RM4 billion, resulting in higher EPS of 52 sen and 148.4 sen.

This was due to higher average selling prices (ASPs) of US$40 (RM170.46) per 1,000 pieces from US$32 per 1,000 pieces, as well as a higher sales volume growth of 40% for FY21E, from 28% previously.

Choo noted that Top Glove’s ASPs in June to August were higher by 5% to 15% due to continuous supply tightness.

“Additionally, we understand that the spot price is expected to move up starting from September 2020. Presently, the spot price is about three times the normal prices of US$28-30/1,000 pieces which accounts for 20% of total capacity allocation.

Choo said he expects Top Glove to have better pricing power and hence potentially higher-than-expected industry average prices.

“Due to tight supply, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal protective equipment (PPE), of which gloves are one of the components, is presently much sought after due to limited supply.

“Longer delivery lead times are indicating that demand will outstrip supply at least over the medium term. Robust demand has led to longer delivery lead times which has risen to over 400-500 days from 80-100 days two months ago."

Choo said Top Glove’s strength lies in its strong management, resilient earnings base due to its pricing power and its sheer size in capacity in the industry, as well as solid earnings growth averaging over 100% for FY21E compared to PERs of 15 times.

As at 10.38am, shares in Top Glove had risen RM2.44 or 11.13% at RM24.36, valuing the group at RM59.11 billion. It saw 10.84 million shares traded.

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