Top Glove Corporation (Top Glove) reported a second consecutive quarterly net loss of RM168.2m in 1QFY23. Sales volume was down by 48% YoY due to a continuous oversupply situation, with lower average selling prices (ASPs) adding to the persistently stubborn headwinds. The results are below our and consensus full-year expectations of ~RM175m gains. We cut FY23 forecasts to a loss position to factor in lower utilization rate and average selling prices (ASPs) given the collapse in demand for gloves due to excessive stockpiles, with 58%/63% cut on FY24/25. Near-term outlook is unmistakably weak though we continue to see value over the longer term. We are now basing our valuation on 2-year average forward earnings to reflect its longer-term recovery, while still pegged to a 5-year average multiple PE of 28x. Our TP is reduced slightly to RM0.53 (RM0.58 previously). We retain our Underperform call on Top Glove given the weak near term outlook.

• 1QFY23 results highlight. Top Glove’s revenue declined 36.1% QoQ to RM632.5m. All three principal regions reported lower QoQ revenue – Malaysia (-40.3%), Thailand (-53.5%) and China (-45.7%), due to lower sales volume and ASP. EBIT margin has also further eroded from 16.4% to -23.7%. The performance was mainly caused by customers’ overstocking of gloves and excess production capacity. Pretax position swung into a loss of RM151.6m YoY with customers having no urgency to place sizeable orders as low utilisation rate amongst the manufacturers means notably shorter delivery times.

• Sales volume and ASPs. For 1QFY23, Vinyl gloves reported the steepest decline in volume (-40% QoQ), followed by nitrile gloves (-33% QoQ), natural rubber (NR) gloves (-30% QoQ) and surgical gloves (-29% QoQ). In terms of ASP, both nitrile and NR gloves decreased by 10% QoQ due to aggressive price competition from glove makers who are exiting the market with exceptionally low selling prices. Meanwhile, surgical gloves’ ASP increased by 5% QoQ, contributed by the Group’s own sterilisations plant to offset the unplanned shut down of a major 3rd parties’ sterilization services, while vinyl gloves’ ASP dropped 13% QoQ due to temporary cessation of production resulting from oversupply and low ASPs.

• Shutting down factories. Management guided that utilisation rate for 1QFY23 is approximately 40%, increasing from 30% in 4QFY22. The Group is focusing on running the optimal number of factories and will likely shut down several old and inefficient factories temporarily in line with the implementation of its cost saving structure.

• Lower raw material prices offset by increased natural gas tariff. The Group is expected to benefit from the current decline in raw material prices, easing pressure on margins. The average natural latex concentrate prices have declined by 7% YoY to RM4.73/kg while nitrile prices have decreased by 49% to USD0.91/kg. Moving forward, nitrile latex price is expected to decline by 8% from Sept 2022 to USD0.86/kg for Dec 2022, while latex is expected to decline 11% from Sept 2022 to USD1.02/kg for Dec 2022. However, this will be offset partly by the 24% increase in natural gas tariff effective from 1 October 2022.

• Challenging near term outlook. The Group remains under pressure given the persistent demand-supply imbalance. We expect the utilisation rate to remain at 30%-40% while ASPs will continue to contract while inventory levels at customers’ warehouses remain high. The current oversupply conditions have limited the ability of glove producers in passing on escalating costs to customers. However, 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.

Source: PublicInvest Research - 15 Dec 2022