• Overview. Top Glove's (TG) 3QFY22 net profit tumbled by 82.5% q-o-q to RM15.3m despite improving revenue which inched up 1.1% thanks to recovery of sales from the US market (+8% qoq). On a y-o-y basis, both net profit and revenue slipped or by 99.2% and 64.8% respectively as overall form was hurt by higher production costs as well as a decline in ASP. This was added by oversupply condition and therefore, a drop in PBT by 59.9ppts.

• Key highlights. US market is expected to recover at a slower pace due to heated competition on the gloves industry. This may result in a flat utilisation rate or at 50% in the foreseeable future. As for ASP, the management guided that its products mix was close to the bottom or c.USD25/1kpcs. TG did not plan to increase its glove pricing for the time being given the supply oversupply condition and this is expected to hurt its bottom line.

• Against estimates: Below. 9MFY22 net profit of RM288.6m (-96% yoy) was below our in-house and consensus expectation which accounted only 57.8% and 54.8% of our full year forecast. This less-than-inspiring achievement stemmed mainly from margin compression due to escalating cost input.

• Outlook. Moving forward, we expect margin to remain thin no thanks to inflationary environment which hit commodity market quite severe. Of note, prices for natural latex and nitrile butadiene latex have gone up by 19% and 40.8% on a q-o-q basis during 1QCY22, and this is expected to increase further due to supply chain disruptions. Overall, TG prospect may remain challenging due to 1) margin compression 2) lower utilisation rate and 3) a decline in ASP.

• Earnings revision. We revised downward our FY22F/FY23F/FY24F earnings by 33%/31%/25% due to its less-than-encouraging form YTD and challenging outlook.

• Our call. Downgrade to a SELL from a HOLD call on TG with a lower TP of RM1.00 (from RM1.60 previously). Our valuation is based on a PER of 18x that is pegged to CY23F EPS of 5.6 sen.

Source: BIMB Securities Research - 10 Jun 2022