Investment Highlights

• We maintain our HOLD call on Top Glove Corporation (Top Glove) with a lower fair value (FV) of RM1.08 (from RM1.90), with a rolled forward target PE from CY23F to FY24F. This is pegged to 1 standard deviation below its FY17–FY19 prepandemic average of 28.5x given the ongoing normalisation of average selling prices (ASP). There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• We cut our net profit estimates for FY22F by 32%, FY23F by 74% and FY24F by 63% due to: 1) a deferral in capacity increase assumptions; ii) 15%–25%-point reduction in plant utilisation rates, in line with the industry’s 50%–60%; and iii) 6% rise in average cost of natural gas to RM36.42/MMBtu in line with the new prices stipulated by Gas Malaysia.

• Top Glove’s 9MFY22 net profit tumbled 96% YoY to RM289mil, which is substantially below expectations, accounting for 63% of our earlier FY22F earnings and street’s. No interim dividend was declared as expected.

• The group’s 3QFY22 earnings plummeted 71% QoQ to RM15mil despite flattish revenue due to compressed margin brought on by a 7% QoQ reduction in ASP to US$25/1,000 pcs (Exhibit 2) while production costs rose, particularly natural gas, electricity tariffs and a higher minimum wage from 1 May this year. As a result, the group was unable to fully effect cost pass-through.

• While the company’s blended glove ASP fell 69% YoY in 3QFY22 from a peak of US$81/1,000 pcs in 2QFY21, management guided that 4QFY22 ASP could be still experience downward pressure albeit at a slower rate.

• Our assumptions currently incorporate a blended FY22F– FY24F ASP of US$24–US$25/1,000 pcs in comparison to the pre-pandemic FY19 average of US$23/1,000 pcs.

• Despite the lower ASPs, we observe a 6% QoQ growth in total sales volume, particularly sales to the US from Malaysia, where growth commendably reached 8% QoQ.

• After the US Customs and Border Protection withdrew its ban on 10 September 2021, Top Glove has gradually been recovering its footing in the world's largest glove consumer market, which accounts for 35% of global demand. Top Glove plans to launch its sustainability policy on 15 June 2022 which could support its US market sales expansion.

• However, the share price upside is limited as we believe ASPs could still trend lower in the near term with the supply and demand imbalance possibly persisting until FY23F amid elevated operating costs from energy and raw materials.

Source: AmInvest Research - 10 Jun 2022