Top Glove’s 2Q22 core PATAMI of RM91.5m (-47% QoQ, -97% YoY) brought 1HF22 core PATAMI to RM264.5m (-95% YoY). The results came in below both our and consensus estimates, at 40% and 29% respectively. The key deviation to our forecast is mainly due to higher-than-expected portion of MI. We cut our earnings forecast for FY22-24f by 5-18%, as we raise MI portion and higher operating cost assumption, to better reflect the margin compression arising from its inability to fully pass on the higher cost. Consequently, our TP is lowered to RM1.33 (from RM1.56 previously), implying a valuation of 17.3x (at mean of its 5-year pre-pandemic average) on its CY22f EPS of 7.7 sen. Maintain SELL on Top Glove.

Below expectations. Top Glove’s 2QFY22 core PATAMI of RM91.5m (-47% QoQ, -97% YoY) brought 1HFY22 core PATAMI to RM264.5m (-95% YoY). The results came in below both our and consensus projections, at 40% and 29% respectively. The key variance to our forecast was predominantly due to the higher than-expected portion of MI. 1HFY22 ore PATAMI was arrived at after adjusting for EIs (i.e. foreign exchange gains) amounting to RM8.8m.

Dividend. None declared (2Q21 DPS: 25.2 sen). 1HFY22 DPS: 1.2 sen (1HFY21: 41.7 sen).

QoQ. The 20% decline in ASP was partially mitigated by the 10% growth in sales volume, resulting in revenue falling by 9%. The stronger sales volume was supported by the recovery in sales to US (+120%) following the lifting of US CBP ban, as well as the resumption of glove restocking activities. In spite of that, margins have continued to narrow, with EBITDA margins compressing 8.0ppts QoQ to 13.7%, due to higher natural gas and electricity costs, and also steeper ASP decline that was not fully compensated by the change in raw material prices (NBR: -36%, Latex: +10%). Consequently, core PATAMI was 47% lower QoQ.

YoY. Revenue fell 73% YoY, due to the correction in ASP (-67%) and lower sales volume (-21%), as buyers delay glove purchases to drawdown on inventories and to avoid locking in supplies at high prices. As a result of raw material prices falling at a slower pace (NBR: -50%, Latex: -6%) than ASPs, EBITDA margins narrowed by 57.1ppts YoY to 13.7%. With that, core PATAMI slumped by 97% to RM91.5m.

YTD. Revenue was 70% lower, owing to normalising ASP (-59%) and lower sales volume (-28%). EBITDA margins suffered a 50.8ppts squeeze to 17.9%, due to raw material prices falling at a slower rate (NBR:-25%, Latex: -2.5%) than ASPs. Higher operating costs (i.e. utilities, chemical and labour costs) along with the heightened competition also contributed to the margin squeeze. With that, core PATAMI was 95% lower.

Outlook. Following the resumption of glove shipments to US, utilisation rate has recovered to 73% in Feb 2022 (from 60% in Sept 2021). With ASPs inching closer to pre-Covid levels currently, glove buyers have also gradually resumed glove restocking activities. In our opinion, this should bolster the improvement in utilization rate going forward. As for ASPs, management expects it to potentially inch higher slightly in the coming quarter, mainly to compensate for the expected increase in raw material prices (owing to higher crude oil prices and wintering season for rubber trees). However, given the competitive operating environment currently, we opine that the glove makers might not be able to fully pass on the cost increase to the buyers.

Forecast. We cut our core PATAMI projections for FY22-24f by 5-18%, as raise our forecast on MI as well as operating costs, to better reflect margin compression arising from the inability to fully pass on the extra expenses.

Maintain SELL, TP: RM1.33. Following our earnings revision, our TP on Top Glove is subsequently lowered to RM1.33 (from RM1.56), representing a PE multiple of 17.3x (at mean of its 5-year pre-pandemic average) on its CY22f EPS of 7.7 sen. Given the downside, we maintain our SELL rating on Top Glove.

Source: Hong Leong Investment Bank Research - 10 Mar 2022