Investment Highlights

• We maintain our HOLD call on Top Glove Corporation (Top Glove) with an unchanged fair value of RM1.95. Our valuation methodology is unchanged, using PER of 18x on CY23F EPS. There is no ESG-related FV adjustment based on our 3-star ESG rating.

• We believe that the share’s upside is capped as the ASP downtrend continues. Having said that, the downside is also limited as its share price is now close to the prepandemic level of RM1.95, which was last recorded on 31 Jan 2020.

• Minimal impact from December floods. We gather that six of Top Glove factories in Klang, Selangor were affected by the floods for five days. Most of the glove producing facility remained intact while those affected are already covered by insurance.

• In 2021, Top Glove expanded its capacity by 11% to 100bil pieces per annum. For 2022, we believe that the company’s near-term focus will be to increase its utilization rate instead of expansion. Recall that in 1QFY22, Top Glove registered a weak utilization rate of 55%. This should have improved to around 60% currently but it is still below the pre-pandemic level of 75%–80%.

• Due to the prevailing low utilization rate, we believe that there would not be a shortage of foreign workers in the next 6–12 months for the company.

• Top Glove is expected to release its 2QFY22 earnings in the first half of March. Due to the ongoing trend of lower ASP for gloves, we expect 2QFY22 earnings to be weaker QoQ. However, its balance sheet should remain strong with a net cash position.

• Despite the surge of Covid-19 cases globally due to the Omicron variant, we understand that the ASP for gloves did not increase as the market is still digesting high capacity of gloves which was completed in 2021.

• Earnings estimates maintained. We make no changes to our FY22F, FY23F and FY24F earnings estimates of RM655mil, RM898mil and RM1.06bil respectively.

Source: AmInvest Research - 24 Jan 2022