Investment Highlights

• We maintain HOLD on Top Glove with a lower fair value (FV) of RM1.95 (vs. RM2.60/share previously). Our valuation methodology is unchanged, using PER of 18x on CY23F EPS. There is no ESG-related FV adjustment based on our 3-star rating.

• Earnings missed expectations. Top Glove’s 1QFY22 earnings of RM186mil made up only 11% of our and consensus full-year estimates. Overall, its results missed expectations due to lower-than-expected gloves average selling price (ASP) of US$32/1,000 pieces and a weakerthan-expected utilization rate of 55%.

• 1QFY22 earnings dropped 92% YoY and 70% QoQ. The drop in earnings is due to lower ASP and higher operating cost caused by its weak utilization rate and volume. The ASP decline is in line with the more intense competition in the market where supply has increased as existing players expand their capacities and new players enter the market.

• Dividend of 1.2 sen announced. Payment date will be on 10 Jan 2022 with the ex-date on 24 Dec 2021.

• FY22 earnings estimates cut by 60% to RM655mil. We have also reduced our earnings estimates by 21% for FY23. Our key assumptions for blended gloves ASP for FY22/FY23 are now US$22.1/US$23.0 (previously US$25.4/US$23.0). For FY22, we have factored in the prosperity tax impact. We have also assumed lower utilization rates of 65% and 78% for FY22 and FY23 respectively.

• Tough near-term outlook. Top Glove expects a challenging business environment in the immediate term as competition intensified amidst reduced demand and higher supply. Although its near-term outlook is tough, we believe that its long-term prospects remain bright as we anticipate Top Glove’s volume growth returning to 8–10% annually after the recent decline in volume.

• Lower FV at RM1.95. We cut our FV to RM1.95 due to lower earnings estimates for CY23. Our PE is unchanged at 18x.

• Maintain HOLD call; ESG score maintained at 3 stars. The ASP downtrend should cause earnings to decline QoQ in 2QFY22. However, Top Glove is in a strong net cash position of RM1.38bil.

Source: AmInvest Research - 13 Dec 2021