• Overview. Top Glove's (TG) 2QFY22 revenue receded to RM1.4bn (-8.5% qoq,-73% yoy) mainly due to lower ASP (-20% qoq), despite improved sales volume (+10% qoq). Net profit dropped further to RM87.5m (-52.9% qoq, -96.9% yoy) as margin compressed to 6% (-5.7ppts qoq, -47.4ppts yoy). This is mainly due to raw material prices declining slower relative to ASP trends, lower utilization rate and increases in operating cost such as utilities, manpower and chemical cost.

• Key highlights. Sales to the US improved c.120% qoq and is expected to see continued improvement in coming months as customers start to restock on ASPs approaching pre pandemic level. TG utilisation rate has increased to 73% in February 2022 (previously c.60% in September 2021). In terms of ASPs, management guided that they have increased prices for natural rubber gloves by 4-5% in March to pass on higher latex prices. As for Nitrile gloves, we believe that on account of current higher competition, prices might see some deterioration in 2-3 months before starting to pick up in tandem with higher butadiene raw material prices.

• Against estimates: Below. 1HFY22 net profit of RM273m (-95% yoy) was below our and consensus forecast at 38% and 30% respectively. The shortfall was mainly due to higher cost and diminishing operating leverage.

• Outlook. TG has scaled back their capacity expansion due to an increase in global supply situation. Moving forward, we expect margin could be impacted by the rise in operating cost especially raw material prices. Additionally, due to current stiff competition, the company may not be able to completely pass on the cost increase to customers. Despite near term headwinds, TG’s long term prospect remain positive on structural glove demand growth and stabilizing ASP.

• Earnings revision. We revised down our FY22F/FY23F/FY24F earnings by 30%/12%/11% to factor in the delay in capacity expansion and higher operating cost.

• Our call. HOLD call with lower TP of RM1.60 (from RM1.75) based on unchanged PER 20x pegged to CY23F EPS of 7.9 sen. Note that the glove sector’s forward PE average was around 20x pre-covid19. TG’s balance sheet remain strong with a net cash of RM656m as at 2QFY22.

Source: BIMB Securities Research - 10 Mar 2022