Analysts have started to look beyond Top Glove’s monumental earnings

TOP Glove Corp Bhd’s target price has been subjected to downward review by some local research houses on the basis that its earnings potential may peak in 3Q FY2021 and fall from 4Q FY2021 following a decline in average selling prices (ASPs).

In slashing the glove maker’s discounted cash flow (DCF)-based target price by a hefty 44% to RM4.85 (from RM8.65 previously), Maybank IB Research further expects Top Glove’s earnings per share (EPS) for FY2021-2023E to decrease by 4%/14%/14% on a higher share base with assumption that its proposed dual primary listing in Hong Kong will go through.

Expressing concern over the aggressive expansion by the China’s glove makers, the research house also downgraded Top Glove’s rating to “hold” (from “buy” previously) after rolling forward its valuation to FY 2024E from FY2021E.

“As the China’s glove makers expansion pace is a lot faster than the global demand growth and Malaysia’s glove makers’ expansion, we think China could gain market share in the next five years at the expense of Malaysia and other regional players,” projected analyst Lee Yen Ling in a results review.

“Moreover, the expansion of the China’s glove makers is primarily on medical gloves (vs non-medical gloves in the past) and would compete with Malaysian players head-on.”

Yesterday, Top Glove announced a net profit of RM2.9 bil for its 2Q FY2021 ended Feb 28, 2021 which is close to 24 times higher than the corresponding period in FY2020 (2Q FY2020: RM116.01 mil).

For the 1H FY2021 period, the world’s largest glove maker saw its net profit climbing 2,220% or 22 times to RM5.29 bil (1H FY2020: RM227.77 mil).

While acknowledging that Top Glove’s 1H FY2021 core net profit of RM5.26 bil came in above its expectations, AmBank Research maintained its “hold” rating on Top Glove with a lower fair value of RM5.46 (from RM5.63 previously) that is based on CY2022 fully diluted EPS over an unchanged price-to-earnings ratio (PER) of 23 times.

“Our fair value downgrade incorporates an ESG (environmental, social and governance)-adjusted discount of 3% for our rating of two stars,” noted the research house.

Kenanga Research which maintained Top Glove’s rating as “outperform” slashed the glove maker’s target price by 20% to RM6.80 (from RM8.50 previously) in view of the latest forward ASP guidance amid diminishing sentiment on the sector.

“Our target PER is at a 30% discount to normalised five-year pre-COVID 19 historical forward mean averaging 16-18 times,” justified analyst Raymond Choo Ping Khoon.

“From the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players which commands 65-68% of global market share as they have consistently evolve and innovate in terms of products and plant modernisation via automation,” Choo pointed out.

“Assuming that the Hong Kong Stock Exchange (HKEX) listing is completed, our indicative theoretical target price could be at RM5.80 (based on enlarged share base of 9.7 billion units).”

At 9.33am, Top Glove was up 20 sen or 3.85% to RM5.39 with 16.84 million shares traded, thus valuing the company at RM44.22 bil. – March 10, 2021

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