Top Glove’s 2QFY22 net profit dropped by 52.9% QoQ to RM87.5m due to normalisation of average selling prices (ASP). On a YoY basis, the group registered a 96.9% YoY decline in net profit mainly due to high base effect where 2QFY21 was lifted by the Covid-19 outbreak. The results were below both our and consensus estimates at 33.2% and 29.8% of full-year estimates respectively. The discrepancy in our forecast was mainly due to higher-than-expected operating expenses. We slash our earnings projections for FY22- 24F by 22-41%, after factoring in higher operating expenses and raw material cost. However, we have assumed higher utilisation rate in view of faster-than-expected recovery in US sales. Subsequently, our TP is lowered to RM1.48 from RM1.90, implying a PE multiple of 17x (at its pre-Covid historical 5-year mean) pegged to its CY23F EPS of 8.7sen. We maintain our Neutral call.

• 1QFY22 results highlight. Revenue down 8.5% QoQ to RM1.4bn, in tandem with the softening of blended ASP (-20% QoQ), offset by higher sales volume with nitrile, natural rubber and vinyl gloves increased by 21%, 2% and 120% respectively. On the other hand, surgical gloves sales volume has decreased by 11% mainly due to third parties sterilization facility constraints. EBIT margin dropped 8.6ppts QoQ to 7.8% as the decrease in raw material prices was at a slower pace compared to the decline in ASP. Operating profits declined by 56.7% QoQ to RM112.8m, while net profit was 52.9% lower QoQ to RM87.5m.

• Recovery in US sales. On a QoQ basis, sales to the US have increased by 120%, which represented c.80% of Top Glove’s US business prior to forced labour issue. We expect the recovery in sales volume to continue in the coming quarter due to the fact that customers should start reordering given the drop in ASP.

• Earning adjustment. We have assumed higher labour cost and energy cost as management has guided its minimum wages has increased to RM1,400 from RM1,200 effective 1 March while natural gas and electricity tariff has increased by 12% and 17% respectively. In addition, we have assumed higher nitrile cost given the increase in crude oil prices.

• Outlook. We believe the demand for gloves will remain robust even post pandemic as gloves are considered essential items within the healthcare industry and due to higher hygiene awareness as well as higher glove usage per capita from developing countries. However, we remain wary following the Russia-Ukraine conflict which could worsen the inflationary issue and logistical constraints. That said, management estimates that the geopolitical tension will affect less than 5% of its total sales volume.

Source: PublicInvest Research - 10 Mar 2022