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 based on a FY24F P/BV of 1x (1 standard deviation below 10-year average) instead of PE valuation given volatile earnings in the rubber glove industry. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• Top Glove’s 9MFY23 core net losses of RM421mil came in below expectations, 2% above our earlier FY23F net loss and accounting for 91% of street’s. 

• The deviation was mainly attributed to a smaller-thanexpected average selling price (ASP) increase of 6% QoQ compared to a >20% guidance in Mar briefing, as well as a 21% QoQ decline in sales volume as a result of customers shifting demand to Chinese competitors following recent ASP hikes among Malaysian glove makers.

• Hence, we raise FY23F loss by 25% to RM520mil from RM414mil after factoring in a potential decrease in ASP in 4QFY23F due to lower raw material prices, bringing FY23F ASP to US$22/1K pcs (from US$23/1K pcs previously) and a lower plant utilisation rate (PU) of 24% (from 40% previously) on delayed replenishment assumption to 4QCY23 from 3QCY23 previously. Nevertheless, 4QFY23F core losses will be narrower given lower natural gas prices.

• In addition, we reverse FY24F earnings to a loss of RM174mil (from an earlier profit of RM245mil) and cut FY25F net profit by 48%, primarily attributable to lower ASP assumptions of US$24-25/1K pcs (from US$25-26/1K pcs previously) and PU assumptions of 32%-54% (from 70%- 80% previously).

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

• On a QoQ basis, Top Glove registered a narrower 3QFY23 core net loss of RM117mil (-31%) mainly due to:

1. Decommissioning obsolete production lines with annual capacity of 5bil pcs (bringing total capacity to 95bil pcs/annum from 100bil and incurring immaterial impairment charges of <RM2mil), alongside with temporarily closing 35bil pcs/annum of capacity from 15bil pcs/annum earlier. This enabled the group to reallocate orders to more efficient plants and save on fuel expenses, thereby reducing production costs.
    
2. Implemented a manpower restructuring exercise by laying off 600 people from current 12K-13K workforce under a mutual separation scheme (MSS),
    
3. Natural gas price moderated by 14% from RM67/MMBtu to RM58/MMBtu, and
    
4. Negative effective tax rate at -13% (vs a positive rate of 6% in 2QFY23) due to the release of unabsorbed tax losses and capital/reinvestment allowances.

• Blended ASP rose 6% QoQ US$22-24/1K pcs in 3QFY23 from 2QFY23 (Exhibit 2) after Top Glove raised glove prices between Feb 2023 to May 2023 to partially pass on higher raw material and natural gas costs.

• However, 3QFY23 PU has decreased to 22% (from 27% in 2QFY23) following Top Glove’s ASP hike back in Feb 2023 onwards. Based on channel checks, this trend is consistent with other Malaysian glove makers, and we believe the orders have migrated to Chinese players which have not increased ASP materially. We highlight that Top Glove’s estimated PU is calculated based on total capacity of 95bil pcs/annum (which includes plants that are temporarily shut down).

• Going forward, Top Glove guided for a positive ASP outlook over the next 3 months as the group believe customers’ inventory level has been coming down and could replenish in 2HCY23F. However, we have a different view. To recap, the basis that Malaysian glove makers used to persuade customers for ASP hikes in Feb 2023 was the rise in raw material and natural gas prices. However, as these costs have moderated recently (Exhibit 4), we believe customers will use these developments to request for a lower ASP.

• Given the lack of pricing power by Malaysian glove makers (low industry PU at 20%-45% in 2QCY23), we believe there is downside risk to ASP trajectory in 3QCY23F. If this materialises, this could dampen near-term market interest in the glove sector as market appears to be pricing in the worst-is-over ASP prospects since 16 Mar 2023.

• The stock currently trades at a high FY25F PE of 48x, which is 2.4x above its 10-year average of 20x and offers no dividend upside at this juncture.

Source: AmInvest Research - 19 Jun 2023