Top Glove Corporation (Top Glove) reported its first quarterly loss, posting a net loss of RM52.6m for 4QFY22. Sequentially, sales declined by 32.3% QoQ due to a weaker demand for gloves as well as lower average selling prices (ASPs). The results were further aggravated by an increase in operating cost, particularly energy and wage costs. For FY22, core net profit of RM178m came in below expectations, accounting for only 46% and 59% of our and consensus estimates respectively. We slash our FY23-24F earnings forecasts by 35-59% to factor in lower utilization rate given the collapse in demand for gloves due to excessive stockpiles, while upward revisions in ASPs are likely to be capped by the oversupply conditions. In addition, we raise our operating cost assumption due to higher labour and energy costs. Consequently, our TP is reduced to RM0.58, based on pre pandemic historical average of 19x PE multiple on a 2-year average forward earnings. Our revised TP implies a potential downside of 18%, hence we downgrade Top Glove to Underperform.

• Revenue down 32.3% QoQ on lower sales volume and ASP. Natural rubber (NR) gloves reported the steepest decline in volume (-44%), followed by nitrile gloves (-26%) and surgical gloves (-20%). In terms of ASP, nitrile and NR gloves posted a 10% and 6% decline respectively. Meanwhile, surgical gloves’ ASP increased by 6% as demand remained stable following the resumption of elective surgeries, post-pandemic, and the commencement of sterilization plant which has helped to ease the bottlenecks arising from the reliance on 3rd parties’ sterilization services. For FY22, NR gloves accounted for 53% of its product mix while 39% was nitrile gloves. Since FY20, the contribution of nitrile gloves has been falling from 47% while NR has been rising from 42% mainly due to a more intense competition from Chinese nitrile glove producers.

• 4QFY22 net loss of RM52.6m. With a falling revenue and coupled with an escalation in cost structure attributed to global supply chain disruptions, higher wage cost as well as natural gas tariff, Top Glove posted its first quarterly loss in 21 years. We note that there was a write down inventory to net realizable value amounting to RM56m in 4QFY22 (RM229m in FY22). However, as we consider this to be part of operating cost to reflect the current market value of its inventory, the write-down is not accounted for in core profit calculation, which was derived after adjusting only the unrealized forex gain of RM21.4m in 4QFY22.

• Challenging near term outlook, though long term remains promising. Gloves remain an essential item in the medical sector and we believe that its long-term growth prospect is still promising given the importance of hygiene, with growing demand from developing markets. Nevertheless, we think the current oversupply conditions will limit the ability of glove producers in passing on escalating costs to customers. As inventory levels at customers’ warehouses remain high, we believe the operating environment for glove makers would still be challenging in 1H2023. In view of the imbalances in demand and supply, the group has implemented cost control by deferring its capacity expansion plan of RM4bn and RM11bn to FY24F and FY25F respectively. Management guided that dividends will be held back until 3QFY23 to preserve cash.

Source: PublicInvest Research - 21 Sept 2022