• Maintain HOLD (TP: RM0.90). Top Glove's 1QFY24 core LATAMI narrowed to RM57.7mn from LATAMI of RM168mn and RM75mn recorded in 1QFY23 and 4QFY23, respectively. This improvement was attributed to better cost control and a surge in sales orders. Nonetheless, the results fell below both our expectations and consensus. Revenue improved by 3.7% QoQ, while LBT decreased from RM461.9mn in 4QFY23 to RM52.9mn in 1QFY24. This encouraging performance resulted from an increase in sales volume as customers replenished orders, supported by lower natural gas prices that offset the hike in raw material prices. We hold the view that the industry is on the path to recovery, with the supply expected to normalize after the decommissioning of the production facility. Regarding demand, we anticipate customers will continue to place consistent albeit modest orders due to product expiry concerns. Maintain a HOLD call on Top Glove, with higher TP of RM0.90 (RM0.74 previously). Our valuation is now based on BV/share of RM0.58 and FY25F P/BV of 1.55).

• Key Highlight. In 1QFY24, sales volume increased by 9% QoQ despite an 8% QoQ narrowing in ASPs. Raw material prices, particularly natural rubber, inched up by 4% QoQ due to weather issues. Nonetheless, natural gas prices declined by 8% QoQ, resulting in a positive EBITDA of RM21.3mn during this quarter. Additionally, the utilization rate has improved to 40% at the current level, and management expects to maintain it despite the recent spike in our nation's Covid-19 cases. Conversely, operating costs for Top Glove are expected to increase in the coming quarter following a hike in natural gas prices.

• Forecast. We cut FY24-25F by 57.1/x43.6% respectively to account for lower margin assumption.

• Outlook. We anticipate Top Glove's losses to gradually recover moving forward. Overall, we hold the view that the industry is on the path to recovery as the supply is expected to normalize after the decommissioning of production facilities. In terms of demand, we foresee customers continuing to place consistent albeit modest orders due to product expiry concerns. We maintain a positive outlook on this trend and anticipate market consolidation in the near term. Nonetheless, despite reduced capacity in the Malaysian market, we remain cautious on the potential for prolonged oversupply due to capacity issues in China.

Source: BIMB Securities Research - 21 Dec 2023