TOP Glove Corp Bhd’s issuance of a two-for-one bonus issue of shares may be a positive move for the world’s largest glove manufacturer, but an effective Covid-19 vaccine may see a correction in share price, say analysts.
“We view the bonus issue positively as it would improve the trading liquidity of Top Glove shares. Under the maximum scenario, the enlarged issued share capital after the proposed bonus issue will increase to 8.2 billion shares from 2.7 billion shares. The bonus issue also allows Top Glove to reward its existing shareholders,” said MIDF Research analyst Jessica Low.
At the same time, Affin Hwang Capital analyst Ng Chi Hoong believes that Top Glove’s average selling prices (ASPs) for its products could rise by about 39% year-on-year in the group’s 2021 financial year. Ng shared that Top Glove had noted a 25% month-on-month (m-o-m) increase in ASPs from a previous 15% growth for August deliveries.
“We believe that ASPs can continue to increase by at least 5% m-o-m each month moving into FY21E as per management guidance, given the recent resurgence of Covid-19 in developed countries, which will drive demand and ASPs,” said Ng.
RHB Research analyst Alan Lim agrees that demand for gloves will remain high, especially with the US, Brazil, India, and South Africa contributing to a record number of new Covid-19 cases.
Lim also noted that supply is further constrained due to the freeze on foreign worker intakes.
“While glove companies have tried their best to hire more locals, we believe the available domestic workforce is not sufficient in the current environment,” said Lim.
Affin Hwang’s Ng believes that it is also possible for Top Glove’s shares to hit a fair value of over RM110, if the group were to be valued based on a price-to-earnings ratio of 52x (as per Hartalega Holdings Bhd). This includes an earnings estimate revision of 24% to 42% upwards for Top Glove.
“We believe that investors may ascribe a higher valuation due to its strong earnings growth outlook. There is a possibility that Top Glove’s share price could breach RM100 per share, should investors be willing to peg the stock at 52x, and ASPs increase by at least 10% m-o-m for FY21E,” said Ng.
RHB Research’s Lim cautioned that the key risks in Top Glove include an effective Covid-19 vaccine becoming available globally sooner than expected, an extended resolution timeline for the group’s US Customs and Border Protection (CBP) detention order, and a lower-than-expected ASP.
MIDF Research, Affin Hwang, RHB Research and TA Securities all maintained buy calls on Top Glove.
MIDF Research, RHB Research and Affin Hwang also upped their target prices for the glove maker to RM27.94 from RM26.12, RM33.30 from RM28.88, and RM46.40 from RM22.40 respectively.
However, TA securities instead lowered its target price to RM31.17 from RM31.66, citing an assumption of a full conversion of the Employee Share Option Scheme and exchangeable bonds into Top Glove shares.
At 11am, Top Glove’s shares were last done at RM25.10, up 28 sen, with 15 million shares traded. – July 21, 2020
