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Broker's take: Maybank KE raises target price on Top Glove, positive on Malaysia glove sector

MAYBANK Kim Eng (Maybank KE) has maintained its "buy" rating on Top Glove, while raising its target price on the Malaysia glove maker to RM21.90, from RM20 previously.

As at the midday break on Friday, shares of the company, which is dual-listed in Singapore and Malaysia, were trading at S$5.65 on the Singapore bourse, up S$0.09 or 1.6 per cent. 

The company on Thursday posted its highest quarterly net profit and revenue in its 29-year history, thanks to a surge in demand for gloves amid the Covid-19 pandemic. 

For the three months ended May 31, Top Glove saw its bottom line jump 365.7 per cent to RM347.9 million (S$113.6 million), even as its revenue surged 41.9 per cent to RM1.69 billion. Earnings per share (EPS) rose to 13.59 sen from 2.92 sen a year ago.

The firm's strong third-quarter results largely beat analysts' expectations. Its Q3 net profit accounted for 51 per cent of Maybank KE's full-year estimates and 63 per cent of the street's full-year estimates, wrote Maybank KE analyst Lee Yen Ling in a research note on Friday. 

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The brokerage expects Top Glove to post a fourth-quarter net profit of RM782 million, representing a year-on-year increase of 9.8 times, on the back of higher average selling prices (ASP). 

Maybank KE has also raised its EPS forecast for FY20/21/22 by 20 per cent, 8 per cent and 27 per cent respectively, as it accounts for the firm's higher operating leverage and faster capacity growth. 

Among other things, Ms Lee noted that Top Glove registered a record earnings before interest, taxes, depreciation, and amortisation margin of 28 per cent for the third quarter, thanks to lower material costs and higher operating leverage, as plant utilisation rate exceeded 95 per cent. This is up from 85 per cent in Q2 and management targets 100 per cent going forward, she said. 

In addition, Top Glove's management has provided a "bullish guidance" for the months ahead, Maybank KE noted. 

"Management guided for ASP hikes of +15 per cent month on month in June to August, and spot orders to account for 20 per cent of its volume. Even if a vaccine is successfully developed, management remains confident that the demand will be solid in 2021 on stock replenishment activities and the emergence of new glove users," the brokerage explained. 

Separately, in a sector research note on June 9, Maybank KE maintained its "positive" call on the Malaysia glove sector, citing higher ASP. The brokerage said that earnings are "most sensitive to the changes in ASPs, compared to sales volume and costs".

"Prior to the ASP hikes in March 2020, we estimate that every 1 per cent increase in medical glove ASP would result in 5 to 8 per cent increase in net profits for stocks under our coverage," Maybank KE said. 

In addition, the reopening of economies may exacerbate the acute shortage with the emergence of new glove users (retail, food and beverage, airlines) and the potential of a second wave of the virus, it added. 

Its top pick in the sector is Top Glove for its steeper ASP hikes and faster sales volume growth.

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