Top Glove reported a core LATAMI of -RM161.7m (vs 1QFY23: -RM142.8m, 2QFY22: RM91.5m) in 2QFY23, bringing 1HFY23 core LATAMI to -RM304.5m (vs 1HFY22: RM172.9m). Results missed both our (-RM274.2m) and street (-RM303.3m) estimates. Disappointment was mainly due to lower-than-expected revenue. We cut our FY23f/24f/25f earnings forecasts to -RM409.2m/-RM66.3/RM174.3m (from -RM274.2m/RM74.4m/RM182m), mainly as we lower our revenue forecasts. Maintain SELL on Top Glove as the operating environment will remain challenging in the near term. Ability to revise ASP upwards also is not expected to bring Top Glove back to the black anytime soon. TP is unchanged at RM0.53, representing a P/B multiple of 0.8x (at close to -2SD to its 5-year pre-pandemic average), on its FY23f BVPS of RM0.66.

Missing expectations. Top Glove reported a core LATAMI of -RM161.7m (vs 1QFY23: -RM142.8m, 2QFY22: RM91.5m) in 2QFY23, bringing 1HFY23 core LATAMI to -RM304.5m (vs 1HFY22: RM172.9m). Results have missed both our (-RM274.2m) and street (-RM303.3m) full year estimates. The negative deviation was mainly due to lower-than-expected revenue. One-off items (mainly unrealised forex losses) amounting to c.RM3m was added back to arrive at 2QFY23’s core LATAMI.

Dividend. None declared (2QFY22: None). 1HFY23: None (1HFY22:1.2 sen).

QoQ. Revenue moderated by 2.3% predominantly due to softer ASPs (-4%). Sales volume improved by 6% partially due to Top Glove receiving a one-off order supplying to the UK government in Dec 2022. Tender orders are typically sold at a more competitive pricing, which explains the weaker ASP QoQ. Despite the easing of raw material prices (latex concentrate: -1%, nitrile butadiene: -6%), core LATAMI widened to -RM161.7m (vs 1QFY23: -RM142.8m), due to cost pressures. Utilisation rate improved slightly to 32%, vs c.30% in 1QFY23.

YoY. Revenue slipped 57.4% on the back of both moderating ASPs (-34%) and weaker sales volume (-50%). Inflationary cost pressures and low utilisation rate (2QFY23: 32% vs 2QFY22: 64%) has further aggravated the situation, despite the easing of raw material prices (latex concentrate: -16%, nitrile butadiene: -25%). Given the inability to pass on higher costs, Top Glove slipped into losses and reported a core LATAMI of -RM161.7m (vs 2QFY22: RM91.5m).

YTD. Owing to weaker ASP (-28%) and lower sales volumes (-49%), revenue suffered a 22.4% decline. Coupled with costs pressures and overall low utilisation rates (1HFY23: 31% vs 1HFY22: 50%), Top Glove slipped into the red in 1HFY 23, reporting a core LATAMI of -RM304.5 (vs 1HFY22: RM172.9m).

Outlook. As customers’ existing stockpile approaches its shelf life, they have begun replenishing stocks in 2QFY23. However, given the short lead time and availability of idle capacities among glove manufacturers, buyers see no urgency to commit to sizable orders at this point. Top Glove has also begun revising ASPs upwards from Feb CY23 onwards, mainly to accommodate the anticipated increase in raw material costs (due to wintering season and higher butadiene prices). Although raising ASPs may relieve some margin pressures, we do not expect this to bring Top Glove back to profitability soon, as the pricing adjustment is still not sufficient to fully account for the cost increases.

Forecast. We cut our earnings forecasts for FY23f/24f/25f to -RM409.2m/-RM66.3/RM174.3m (from -RM274.2m/RM74.4m/RM182m), as we lower our revenue forecasts.

Maintain SELL, TP unchanged RM0.53. We are keeping our SELL call on Top Glove unchanged as the operating environment will remain challenging in the near term. Ability to revise ASP upwards also is not expected to bring Top Glove back to the black anytime soon. TP is unchanged at RM0.53, representing a P/B multiple of 0.8x (at close to -2SD to its 5-year pre-pandemic average), on its FY23f BVPS of RM0.66.

Source: Hong Leong Investment Bank Research - 17 Mar 2023