Investment Highlights

• We maintain HOLD on Top Glove Corporation (Top Glove) with an unchanged fair value (FV) of RM0.86/share. Our FV is based on a CY24F P/BV of 1.5x (0.75 standard deviation (SD) below 10-year average of 3x). There is no ESG-related FV adjustment based on our 3-star rating.

• We believe that Top Glove’s 1QFY24 core net loss of RM58mil was above expectations as Top Glove guided the group could achieve breakeven or slight profitability in FY24F. Our original forecast was a net loss of RM175mil for FY24F while consensus was estimating a net loss of RM53mil. Top Glove exceeded expectations as profit margins improved on the back of cost-cutting initiatives.

• We are now forecasting a smaller net loss of RM23mil for Top Glove in FY24F compared to our earlier estimate of RM175mil. We have also raised Top Glove’s FY25F-26F core earnings by 57%/22% to account for lower operating expenses. We are keeping our assumption that the inventory replenishment cycle would begin in 1Q2024. We expect sales volume and selling prices to improve in 1Q2024.

• In tandem with the upward revision in the group’s FY25F26F earnings forecasts, we increase Top Glove’s gross DPS from 1.0/2.0 sen to 2.0/3.0 sen for FY25F-26F.

• On a QoQ basis, Top Glove registered a smaller core net loss of RM58mil in 1QFY24 vs. RM77.9mil in 4QFY23 due to a 9% rise in sales volume and cost-cutting initiatives, despite higher raw material prices and lower average selling prices (ASP).

• On a negative note, ASP fell in 1QFY24. Blended ASP decreased by 6-8% QoQ to US$19-21/1K pcs in 1QFY24 from US$21-22/1K pcs in 4QFY23 (Exhibit 2), in order to pass on lower raw material prices in 4QFY23 (lag-effect) amid volatile demand.

• Plant utilisation rate (PU) improved to 22% in 1QFY24 from 20% in 4QFY23 (Exhibit 3). Based on channel checks, the improvement is consistent with the other Malaysian glove makers. The increase in demand came with the cost of lower ASP. Top Glove’s estimated PU is calculated based on total capacity of 95bil pcs/annum (which includes plants that are temporarily shut down).

• Top Glove guided for higher selling prices and demand in 1Q2024. The group said that orders were stronger MoM in Dec 2023 and Jan 2024 because of the further depletion of excess inventory. Also, the pricing differential for medical rubber glove between Malaysia and China is narrowing. Hence, there is incentive for customers to switch to Malaysian gloves, which have better quality and more sustainable manufacturing processes (ie. the use of natural gas instead of coal).

• In terms of cost outlook, nitrile prices are expected to decrease by 5% QoQ in 1Q2024. However, latex prices are envisaged to increase by 4% in 1Q2024 as unfavarouble weather conditions affect supply. Lastly, natural gas prices are anticipated to rise by 3% in 1Q2024 due to the recovery in Brent oil prices.

• The stock currently trades at a fair CY25F PE of 22x, which is 10% higher than the 10-year average of 20x.

Source: AmInvest Research - 21 Dec 2023