Investment Highlights

• We maintain HOLD on Top Glove with an unchanged fair value (FV) of RM1.90. 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 within our expectations but below consensus. 1HFY22 earnings of RM273mil made up 51% of our FY22 full-year earnings estimates. However, it was below consensus at 30% of FY22 forecast. No dividend was announced for 2QFY22.

• 2QFY22 earnings dropped 53% QoQ to RM88mil. The drop in earnings is due to lower ASP and higher operating costs. Blended gloves’ ASP declined 20% QoQ to US$27 per 1,000 pieces. We gather that costs such as utilities, manpower and chemicals have increased.

• Here are the updates from yesterday’s conference call:

1. Less competition from Chinese glovemakers for nitrile gloves. This is caused by the US action of imposing a 7.5% tariff on medical gloves imported from China effective 1 Dec 2021. For natural latex gloves, there is an increase in March ASPs due to the cost pass-through mechanism.
2. Emerging signs of demand recovery with sales volume improving 10% QoQ in 2QFY22. We view this positively as it indicates that growth in long-term demand for gloves remains healthy. Top Glove sales to the US surged by 120% QoQ in 2QFY22. This shows that the ESG initiatives taken to address labour issues highlighted by the US Customs and Border Protection (CBP) have started to bear fruit. We gather that Top Glove has regained almost 80% of its US sales which were previously affected by the US CBP ban.
3. The utilization rate has improved to 73% in February 2022 compared to 1QFY22 level of 55%.
4. The latest nitrile/latex/others product mix in 2QFY22 was 37%/55%/8% vs. 34%/59%/7% in 1QFY22.
5. ESG update: Top Glove now sits among the top 10% in the Dow Jones Sustainability Index. It has also been included in the Bloomberg Gender Equality Index and S&P Global Sustainability Yearbook.

Source: AmInvest Research - 10 Mar 2022