Investment Highlights

• We maintain our SELL call on Top Glove Corporation (Top Glove) with an unchanged fair value (FV) of RM0.60/share. This is pegged to a target FY24F PE of 20x, at parity to its 10-year average. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• Top Glove reported a 1QFY23 core net loss of RM134mil. This was below our expectations of a net loss of RM48.6mil for FY23F and consensus, which had predicted a net profit of RM176mil.

• The deviation came mainly from weaker than expected selling prices and demand, which resulted in a sub-optimal plant utilisation rate (PU).

• We are now expecting Top Glove to record a larger FY23F core net loss of RM132mil vs. RM48.6mil previously. We have reduced our assumptions on Top Glove’s average selling price (ASP) and PU. However, we retain our FY24- 25F earnings forecasts for Top Glove in view of improving supply and demand dynamics.

• No interim dividend has been declared this quarter, which is in line with our assumption. Top Glove has halted dividend payments in the short-term to preserve its cash reserves.

• On a QoQ basis, Top Glove registered a larger 1QFY23 core net loss of RM134mil (-7.6x) in tandem with the 36% drop in revenue. The weaker revenue was mainly due to an 8% decline in ASP and lower sales orders (-32%) as a result of customers holding off restocking activities. Losses also widened QoQ in 1QFY23 dragged by rising costs of gas, electricity and labour.

• The blended ASP was US$21.5-22.5/1K pcs in 1QFY23, 8% lower than 4QFY22 (Exhibit 2). This was mainly due to aggressive pricing from local and regional competitors.

• Based on our channel checks, Malaysian glove makers are selling normal nitrile medical gloves at an ASP of US$17- 19/1K pcs in Dec vs. Chinese glove makers’ US$14-15/1K pcs (or US$15-16/1K pcs inclusive of the 7.5% US-tariff). This implies that there could be further downside of US$2- 3/1K pcs for nitrile medical gloves.

• Top Glove’s plant operated at a lower utilisation rate of 30% in 1QFY23 compared to 30-40% in 4QFY22 and 85-90% pre-pandemic (Exhibit 3). On a positive note, Top Glove received healthy orders for Dec 2022 and Jan 2023, which could increase the PU to 40%.

• Top Glove’s EBITDA swung into the red in 1QFY23 due to the sub-optimal PU, which increased the unit cost of production. Going forward, we believe that Top Glove would be focusing on improving the utilisation rate of its plant instead of raising prices. We reckon that this would result in stiff price competition as other glove makers in Malaysia try to maintain their market share.

• On a positive note, Top Glove guided that the customer replenishment cycle will take place from 2QCY23 onwards as inventories are depleting. This would increase the PU by 10 to 20 percentage points.

• The stock currently trades at a FY24F PE of 25x, which is 25% above its 10-year average. We believe this is unjustified in view of ongoing challenges remain unabated.

Source: AmInvest Research - 15 Dec 2022