Investment Highlights

• We maintain SELL call on Top Glove Corporation (Top Glove) with an unchanged fair value (FV) of RM0.60/share. This is based on a CY24F P/BV of 1x (1 standard deviation below 10-year average of 3.4x). There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• Top Glove’s FY23 core net losses of RM498mil came in within expectations, 4% below our full-year loss estimate and 3% of street’s. We have excluded RM389mil one-off impairments and write-offs for property, plant & equipment (PPE) and goodwill in 4QFY23.

• Notably, management guided for no additional impairments/write-offs if the business environment does not worsen from now.

• Hence, we maintain FY24F-25F earnings while introducing FY26F net profit with a 2.2x YoY growth, supported by recoveries in plant utilisation rate (PU) and average selling prices (ASP).

• No final dividend has been declared, in line with our expectation as Top Glove halted dividend payments in the short-term to conserve cash reserves.

• On a QoQ basis, Top Glove registered a narrower 4QFY23 core net loss of RM78mil (-33%), despite a 10% decline in revenue as a result of declines in both ASP (-5%) and sales volume (-10%). The narrower losses were mainly due to: (1) 13% QoQ decline in natural gas price, from RM58/MMBtu to RM50/MMBtu; and (2) Lower depreciation charges following RM389mil impairments and write-offs on PPE and goodwill.

• Blended ASP decreased 5% QoQ to US$21-22/1K pcs in 4QFY23 from US$22-24/1K pcs in 3QFY23 (Exhibit 2), mainly from passing through declining raw material and natural gas price trends.

• Despite lower ASP, PU in 4QFY23 remained subdued at 20% compared to 22% in 3QFY23 (Exhibit 3). Based on channel checks, this depressed demand, consistent with other Malaysian glove makers, could be attributed to order migration to China-based players given that China’s normal nitrile medical gloves still price at a discount of US$3-4/1K pcs. To recap, Malaysian glove makers increased ASPs back in 2QCY23 while Chinese glove makers did not.

• 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 positive ASP and PU outlook in 4QCY23F. The group indicated that customers' inventory levels have been decreasing as the group observed stronger orders MoM in 4QCY23F. This also enables Top Glove to pass on higher raw material costs (particularly nitrile) to customers.

• However, we have a different view as our channel checks indicate that ASP for Malaysian normal nitrile medical gloves have declined MoM from US$20/1K pcs in Jul to US$17-18/1K pcs in Oct 2023, despite higher raw material prices. Hence, our assumption for inventory replenishment and sustainable ASP upward revision have been deferred to 1QCY24F from 4QCY23F previously, as we believe volume recovery should precede a sustainable ASP uptrend.

• In terms of cost outlook, nitrile price is expected to increase 4QCY23F in tandem with higher Brent oil prices since late June 2023. However, latex prices are expected to decrease in 4QCY23F due to weak demand. Lastly, natural gas is expected to decline further by 5% 4QCY23F, before rising in 2024 as Brent oil prices recovered since late June 2023.

• Despite material correction in share prices since late-May 2023, the stock currently still trades at a high FY25F PE of 37x, which is 1.9x above its 10-year average of 20x and offers no dividend upside at this juncture.

Source: AmInvest Research - 9 Oct 2023