Further correction imminent for Top Glove based on worsening indicators, says HLIB

KUALA LUMPUR (April 26): Hong Leong Investment Bank (HLIB) Retail Research said that after failing to break above its long-term resistance area of RM1.05-RM1.14, Top Glove Corp Bhd's share price corrected to RM1.00 on Tuesday (April 25).

In a technical tracker note on Wednesday, the research house said that a further correction is imminent based on the worsening indicators.

It said a decisive break down below the RM1.00 physiological level will dampen the share price toward RM0.91-RM0.87-RM0.76 and advised investors to cut loss at RM1.19.

HLIB opined that while raising average selling prices may relieve some margin pressure, it does not expect this to bring Top Glove back to profitability soon due to two factors.

“Firstly, we expect Top Glove's plant utilisation rate to remain subdued since buyers are reluctant to place sizeable orders given the short lead time and the availability of idle capacities among other glove manufacturers.

“Secondly, although pricing adjustments have been made, they are still not sufficient to fully cover the cost increases driven primarily by higher natural gas prices (+15%) and electricity tariffs (+5.4 times),” it said.

To sum up, HLIB said Top Glove's recent rally in share price has grossly priced in the positives.

It said with no new catalysts on the horizon, further upside for Top Glove may be limited.

“Therefore, we reiterate our sell-on-strength stance.

“Unlike its peers whose net cash positions [are] worth billions, Top Glove's net cash level stood at a relatively low level of RM270 million or 3% of its market cap.

“With HLIB and market consensus expecting Top Glove to remain loss-making in the upcoming two quarters, there is a chance that the cash pile will decrease further, which might lead to a de-rating in share price due to a higher risk premium,” it said.