Macquarie downgrades Top Glove to 'underperform', halves target price as earnings could normalise in 2H21

 

KUALA LUMPUR (Sept 10): Macquarie Research has downgraded its recommendation on Top Glove Corp Bhd to underperform from outperform previously, and lowered its target price to RM5.45 from RM10.13 prior (priced to account for bonus issue).

The research firm said this is due to the fact that while its short-term results are expected to be robust and higher average selling (ASPs) will drive ratings upgrades, earnings are expected to peak in FY21 and will unlikely repeat once the demand-supply equation normalises — either in the second half of 2021 or the 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 PER [price-earnings ratio] multiples should mimic those of the consumer staples at 40-50x, we believe investors should be ascribing these multiples on long-run earnings, rather than peak earnings. At current levels, TOPG’s shares are trading at a lofty 70x FY23E PER,” said Macquarie Research in a note yesterday.

According to the research house, the current supply of gloves remains very tight and thus, ASPs will continue to rise — at a rate of 15% to 20% every month until November.

The coming flu season in the northern hemisphere and reopening of borders will also fuel demand for gloves, it added.

“Against this backdrop, we have modelled in 20%-25% ASP increases for nitrile gloves between Sept-Dec 2021 — resulting in an RM10.3 billion profit in FY21,” it said.

Macquarie expects Top Glove to post a net profit of RM1.75 billion for FY20, which will rise to RM10.3 billion FY21, before easing to RM2.02 billion for FY22.

For the first nine months ended May 31, 2020 (9MFY20), Top Glove’s net profit nearly doubled to RM575 million from RM290.51 million last year, while revenue leaped 14.26% to RM4.13 billion from RM3.61 billion, driven by unparalleled growth in sales volume on the back of the global COVID-19 pandemic.

At market close, Top Glove shares price fell 9.79% or 70 sen to RM6.45, valuing the company at RM52.36 billion. Some 168.85 million shares changed hands.

http://www.theedgemarkets.com/article/macquarie-downgrades-top-glove-underperform-halves-target-price-earnings-could-normalise