Top Glove’s 4QFY22 core LATAMI of -RM80.7m (3QFY22: -RM8.6m, 4QFY21: RM447.4m) brought full year FY22 core PATAMI to RM175.2m (-98% YoY). The results came in below both our and consensus estimates, at 63% and 58% respectively. The negative deviation to our forecast was mainly due to higher than-expected cost of sales. We cut our earnings forecast for FY23-24f by 18- 52%, as we lower our utilisation rates assumption for FY23f/24f to 55%/75%. Our valuation base year is also rolled over to CY23f. Our TP is lowered to RM0.54 (from RM0.83), representing a PE multiple of 17.3x (at mean to its 5-year pre pandemic average) on its CY23f EPS of 3.1 sen. Maintain SELL.

Below expectations. Top Glove’s 4QFY22 core LATAMI of -RM80.7m (3QFY22: -RM8.6m, 4QFY21: RM447.4m) brought full year FY22 core PATAMI to RM175.2m (-98% YoY). The results came in below both our and consensus estimates, at 63% and 58% respectively. The negative deviation to our forecast was mainly due to higher-than-expected cost of sales. 4QFY22 core LATAMI was arrived at after excluding EIs (mainly forex gains) amounting to RM28.1m.

Dividend. None declared (4Q21 DPS: 5.4 sen). FY22 DPS: 1.2 sen (FY21: 65.1 sen).

QoQ. Revenue declined 32%, on the back of both weaker sales volume (-35%) and lower ASP (-5%). Despite raw material prices easing (natural latex concentrate: -10%, nitrile butadiene: -5%), margins continued to remain in the negative territory, as utilisation rate remains low (4QFY22: c.40-45% vs 3QFY22: c.50-60%), resulting in lower operating leverage. Not to mention that natural gas tariff was also 10% higher QoQ and 4QFY22 has reflected the full impact of higher minimum wage. With that, core LATAMI widened to -RM80.7m (3QFY22: -RM8.6m).

YoY. Revenue was 52% lower, due to a decline in both ASP (-52%) and sales volume (-27%) as glove demand normalises. Coupled with lower utilisation rate and higher operating costs (manpower costs, fuel costs, electricity costs), margins continued to come under pressure (EBITDA margin -32ppts YoY). All in, Top Glove reported a core LATAMI of -RM80.7m (vs 4QFY22: RM447.4m).

YTD. Softer glove demand has resulted in revenue declining 66%, as ASP retraced 59%, while sales volume weakened by 25%. The Group was not spared by the high inflationary environment and has experienced production costs increase in FY22. In view of the oversupply situation, Top Glove was unabl e to pass on the cost increases, leading to narrower margins (EBITDA margins -47ppts). Consequently, core PATAMI slumped 98%.

Outlook. While Top Glove has indicated its ability to pass on part of its cost increase to glove buyers (ASP +5% in Oct), we reckon that the Group is not entirely out of the woods yet, given the persistent demand-supply imbalance. We expect utilisation rates to remain low in the coming months, as glove buyers have yet to fully deplete their inventories in hand. Any potential price adjustments in the near future are also expected to be marginal, mainly to share part of the higher costs, rather than a positive signal of improving operating environment.

Forecast. We cut our core PATAMI projections for FY23-24f by 18-52%, as we lower our utilisation rates assumption for FY23f/24f to 55%/75% to reflect the industry-wide low run rates. Our valuation base year is also rolled over to CY23f.

Maintain SELL, TP: RM0.54. Our TP on Top Glove is subsequently lowered to RM0.54 (from RM0.83), representing a PE multiple of 17.3x (at mean to its 5-year pre pandemic average) on its CY23f EPS of 3.1 sen. Reiterate SELL on Top Glove.

Source: Hong Leong Investment Bank Research - 21 Sept 2022