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Broker's take: Maybank KE ups Top Glove target price, sees 'small impact' from US detention order

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Hikes in the average selling price (ASP) of gloves in the next six months could continue to support Top Glove's share price, said Maybank Kim Eng on Wednesday.

HIKES in the average selling price (ASP) of gloves in the next six months could continue to support Top Glove's share price, said Maybank Kim Eng on Wednesday.

That being said, Top Glove's high ASP premium against its peers will likely dissipate starting in the second quarter of 2021 in anticipation of more new supply, according to the research team.

Maybank Kim Eng maintained its "buy" call on the world's largest glove manufacturer.

It increased the 12-month target price to RM28.60 from RM21.90 previously, while raising its estimates for earnings per share by 13 per cent for FY20, by 103 per cent for FY21, and by 52 per cent for FY22 on higher ASP assumptions.

Shares of dual-listed Top Glove were trading at RM24.42 on the Malaysia bourse, down RM0.52 or 2.1 per cent as at 11.37am on Wednesday. On the Singapore Exchange, the counter fell S$0.08 or 1 per cent to trade at S$8.16 as at 11.51am.

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The recent US detention order on two of its subsidiaries - which account for 12.5 per cent of its total sales volume - will likely have a small impact on the group, Maybank Kim Eng analyst Lee Yen Ling wrote.

On July 15, the US Customs issued a detention order on imports of disposable gloves manufactured by the subsidiaries, possibly over forced labour concerns.

Following the detention order, Top Glove has engaged independent consultants to verify all aspects of its foreign workers' welfare, such as overtime, passport safekeeping, accommodation and recruitment fees. 

The company said it is hopeful the issue will be resolved by mid-August. In the event that the matter drags on, it will re-route the detained shipments to other markets at a lower ASP - about 5 per cent below the price to the US.

Assuming it takes one month to re-route the shipments, this will reduce Maybank Kim Eng's FY20 net profit estimates by 2 per cent, said Ms Lee.

Meanwhile, Top Glove on Wednesday clarified that the visit by the Malaysian authorities on July 13 - two days before the US decision - was an "inspection" of its office and workers' quarters, and not a "raid" as earlier reported by some media outlets.

However, Malaysia's Ministry of Health found there was a lack of social distancing in one unit of the workers' house, and the offence was compounded with the collection of a RM1,000 (S$325) sum from the company. This non-compliance was immediately rectified, Top Glove said in its press statement.

Malaysia's Ministry of Human Resources has also confirmed that it did not find any element of forced labour at the premises during its inspection.

In Wednesday's research report, Maybank Kim Eng pointed out the wide gap between Top Glove's ASP and its peers'.

The company raised its glove ASP for August by 25-30 per cent month on month. It plans to raise the ASP again for September, by another 20 per cent or so, and these hikes will last till December this year due to the glove shortage.

In contrast, Top Glove's peers are likely to raise their ASPs by just 10-15 per cent month on month until December, Ms Lee said.

"In our view, Top Glove can continue to charge a premium in the next six months given the acute shortage. However, as new supply comes online from Q2 2021, we expect Top Glove's ASP to peak in Q1 2021 and to fall from Q2 2021 as it needs to reduce its ASP premium against its peers," she added.

Maybank Kim Eng thus projects Top Glove's quarterly net profit to peak in Q2 FY2021 ending February 2021 at RM2.65 billion on a high Ebitda (earnings before interest, taxes, depreciation, and amortisation) margin of 58 per cent.

Separately, the company on Monday proposed a two-for-one bonus issue of up to 5.48 billion bonus shares. This is meant to reward shareholders and create more liquidity and marketability for the stock, Top Glove said.

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