"We retain our Add call and ex-2-for-1 bonus issue TP of RM9.20 (18x CY21 P/E, in line with its five-year mean)," CGS-CIMB Research said.
KUALA LUMPUR: CGS-CIMB Equities Research reiterates its positive view on Top Glove expects higher average selling prices (ASP), particularly for nitrile gloves at +20% month-on-month (MoM) in September and October and another +10% in November due to strong demand for gloves.
It said on Wednesday it maintained its Add for the world’s largest glove maker with an unchanged TP of RM9.20 (18 times CY21 P/E).
Owing to 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 end-CY21 (natural rubber gloves: 13 months; vinyl gloves: eight months; surgical gloves: four months), from 18 months in June 2020.
Despite increased newsflow on potential discovery of a Covid-19 vaccine, Top Glove believes that 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, as well as increased usage in both medical and non-medical sectors.
Top Glove expects further ASP increases for nitrile gloves while for latex gloves, it expects an increase of 5% MoM in September and October.
“This is also supported by Top Glove recently receiving more spot orders until end-CY20F as it expects to allocate up to 30% (from 20- 25% previously) of its total capacity for spot orders going forward.
“Note that our current FY20F/21F/22F ASP growth estimates stand at +22%/+45%/-36%, ” it said.
CGS-CIMB Research gathered that Top Glove has recently seen shortages in 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.
Meanwhile, Top Glove had on Sept 7 said it had submitted to the US Customs and Border Protection (CBP) the Independent Auditors’ Report in relation to remediation payments.
This is post the completion of the report which also addresses the relevant areas of concern identified by CBP.
Top Glove had on Aug 10 made a first payment of RM4.4mil of the estimated remediation fee of RM53mil; a second payment is expected by Thursday.
“We believe this is a one-off impact that should not affect its profitability in the longer term. Maintain Add with an unchanged TP of RM9.20.
“We retain our Add call and ex-2-for-1 bonus issue TP of RM9.20 (18x CY21 P/E, in line with its five-year mean).
“We like Top Glove as the key beneficiary of the current supply-demand dynamics in the glove sector due to Covid-19 as it is the largest glove maker globally by capacity (85.2 billion pieces per annum as at Aug 31).”