Investment Highlights

• We maintain our HOLD call on Top Glove Corporation (Top Glove) with a lower fair value (FV) of RM0.60/share (from RM0.88/share) with a target FY24F PE of 27x, at 2 standard deviation below its FY18-19 pre-pandemic median of 31x given the ASP downturn amid rising operating costs. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• The lower FV was mainly due to our lower earnings forecasts after noting Top Glove’s above-expected cost structure, which registered a 4QFY22 core loss of RM16mil. However, Top Glove reported a FY22 core net profit of RM408mil (after adding back the RM229mil inventory write-downs). This beat expectations, coming in 34% above our forecast and 36% of consensus.

• Nevertheless, we reverse FY23F earnings to a loss of RM49mil and cut FY24F net profit by 32%, mainly attributable to the higher cost structure. Notably, Top Glove increased the average selling price (ASP) in Oct by 5%. Hence, we marginally adjust our FY23F-24F ASP to US$24.3-25.3/1K pcs from US$24.3-24.6 previously. We also introduce FY25F earnings with a higher plant utilisation rate (PU) of 60% from 55% in FY24F.

• No interim dividend has been declared in this quarter. This brought the total dividend to 1.2sen/share in FY22, which was below our assumption of 4sen/share. Furthermore, we assume no dividend to be paid out in FY23F given our loss expectation.

• On a QoQ basis, Top Glove registered a 4QFY22 core loss of RM16mil mainly due to a 27% drop in revenue. This was due to the continued weakening of ASP as a result of aggressive pricing from local and regional competitors, as well as the lower sales orders. This was exacerbated by rising operating expenses from natural gas, electricity tariff and labour costs.

• The blended ASP for this quarter was US$23.5-24.5/1K pcs, 4% lower than 3QFY22 but still 9% above its pre-pandemic prices. We gather that the ASP in Aug was lower than Jun. Nevertheless, the quantum of QoQ decrease has been slowing down since 1QFY22 (Exhibit 2).

• In terms of PU, Top Glove was running at a shockingly low rate of 30-40% in current quarter as compared to 51% in 3QFY22 and 85-90% in pre-pandemic period (Exhibit 3). This sub-optimal PU increased the overall 4QFY22 cost structure due to lower economies of scales.

• The stock currently trades at a FY24F PE of 32x, with no dividend yield, which is at parity to its FY18-19 prepandemic median of 31x. However, we believe this is premium given that ongoing challenges remain unabated.

Source: AmInvest Research - 20 Sept 2022