Top Glove’s earnings may peak soon

The brokerage remained negative on Top Glove’s listing on the Hong Kong Exchange (HKEX).

PETALING JAYA: Although most brokerages are bullish on Top Glove Corp Bhd, Maybank Investment Bank (MaybankIB) appears less enthusiastic, downgrading its call on the company’s shares to “hold” from “buy” previously.

The brokerage has also lowered its target price for the world’s largest glovemaker to RM4.85 from RM8.65 previously.

The lower discounted-cash-flow (DCF) based target price followed MaybankIB’s rolling forward its valuation for Top Glove to the financial year (FY) ending Aug 31,2024, from FY21 previously, and lowering its long-term-growth estimate to 3.5% from 4.5% previously, in view of the aggressive expansion by the China’s glovemakers.

According to MaybankIB, Top Glove may reduce its nitrile glove average selling prices (ASPs) by 3%-5% month-on-month in April-June 2021, bringing its nitrile glove ASP to around US$100 (RM412) per 1,000 pieces by June 2021 and converge with the ASPs of the price laggards.

“Earnings may peak in the third quarter (Q3) of FY21 and fall from Q4’FY21 as ASPs decline. We maintain our FY21-FY23 estimated net profit, which has already assumed for lower ASPs ahead, ” MaybankIB said in its report yesterday.

“However, our FY21-FY23 estimated earnings per share is reduced by 4%, 14%, 14%, respectively, on a higher share base, as we assume that its proposed listing in Hong Kong will go through, ” it added.

Meanwhile, RHB Research reiterated its “buy” call on Top Glove, but it lowered its DCF-based target price for the counter to RM6.80 from RM8.45 previously.

“We reduced the target price, as we expect a lower long-term nitrile gloves ASP of US$40 per 1,000 pieces, ” the brokerage said, noting the near-term high ASPs would encourage more competition in the future.

RHB Research said Top Glove was currently undervalued.

“After the share price declined 43% from its peak, Top Glove turned into a value play with its attractive near-term dividend yield of 16%, a low FY23 price-earning (PE) multiple of 10.5x (average: 18.0x), and strong balance sheet with net cash of RM4.06bil, ” it explained.

CGS-CIMB Research said it was not overly concerned about the potential decline in ASPs from the second half of FY21, as it had accounted for this in its ASP estimates in FY21-FY23.

On that note, the brokerage reiterated its “add” call on Top Glove, with an unchanged target price of RM7.80.

Despite Top Glove’s strong earnings prospects, CGS-CIMB Research said it based the counter’s target price on 2022 PE multiple of 14x, which was negative one standard deviation below its five-year mean, given ongoing environmental, social, and governance issues (treatment of foreign labour) and US Customs and Border Protection ban on two Top Glove subsidiaries since July 2020.

The brokerage remained negative on Top Glove’s listing on the Hong Kong Exchange (HKEX).

“If its HKEX listing is completed, our theoretical target price would be at RM6.80 (based on an enlarged share base of 9.7 billion), ” it explained.

Top Glove’s net profit jumped 22 times to RM5.23bil for the first half ended Feb 28,2021, from RM227.11mil in H1’FY20, while revenue increased three-fold to RM10.12bil from RM2.44bil.

The strong results, which were largely in line with Bloomberg consensus estimate, was mainly attributable to continued strong demand for gloves globally.

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