• Downgraded to SELL (TP: RM0.85). Top Glove’s 9MFY24 registered a core LATAMI of RM147.9mn (excluding a one-off gain from land disposal and unrealized forex amounting to RM76.6mn) compared to a core LATAMI of RM463.5mn in 9MFY23. The result was below our and consensus full-year forecasts. The variance against our forecast was due to lower-than-expected sales volume and ASP assumptions. In 3QFY24, revenue soared 15.7% QoQ, thanks to growing demand with a 13% QoQ increase in sales volume. However, the group registered a core LATAMI of RM26mn due to higher overall operating costs. The industry is slowly recovering as supply eases with Malaysia decommissioning production facilities. However, despite reduced capacity in Malaysia, we believe oversupply still persists due to Chinese overcapacity, and the market remains below pre-covid levels. We downgraded Top Glove to a SELL from a HOLD call with a lower TP of RM0.85 (RM0.86 previously) following our earnings downgrade and considering the recent rally in the share price, which has stretched the valuation. Our valuation is based on FY25F BV/share of RM0.57 and P/BV of 1.48x.

• Key Highlight. Utilization rate for 3QFY24 is now c.50% and could reach 55% due to encouraging sales demand. This is based on the current running capacity of 60bn units. The group is target to add 3bn more units of capacity with the resumption of temporarily closed factories and the commencement of operations at one new factory. Additionally, Top Glove has successfully implemented a cost-plus pricing approach for its products to adjust for the higher raw material prices.

• Forecast. We cut FY24F from core profit of RM18.1mn to core LATAMI of RM50.4mn and cut FY25F/ FY26F earnings assumption by 32%/ 14.6% to RM59mn/ RM105mn respectively, to account for lower sales volume and ASPs.

• Outlook. Overall, we foresee that the industry is recovering as the oversupply situation is expected to ease after Malaysia decommissions its production facilities. In terms of demand, we anticipate customers will continue to place consistent, albeit modest, orders due to restocking activities. Nonetheless, despite the reduced capacity in the Malaysian market, we believe that the global oversupply is likely to persist due to overcapacity by Chinese glove producers, and the industry remains far from recovery to pre-covid levels.

Source: BIMB Securities Research - 20 Jun 2024