Result

Top Glove registered a net profit of RM185.7m during 1QFY22 which depleted 69.5% qoq and 92.1% yoy. On the same note, revenue stood at RM1.6b which slid 25.2% qoq and 66.7% yoy.

Below estimates. Top Glove’s 3MFY22 net profit of RM185.7 was below our in-house and market estimates which merely account for 7.4% and 10.7% of full year earnings forecasts respectively. The subdued result was dented by lower average selling price (ASP) and sales volume.

First interim dividend declared. The Group has declared a first single-tier dividend of 1.2sen/share during 1QFY22 which make out 9.4% from total dividend payout forecast for FY22F.

Comments

Higher operating cost eroded QoQ margin. Top Glove revenue slumped 25.2% qoq given continued downtrend in blended average selling price (ASP) which slid 32% qoq (nitrile and natural rubber ASP 37% qoq and 28% qoq respectively) on top of disappointing sales volume following poor nitrile rubber sales volume (-14% qoq) despite higher sales volume in natural rubber (+7% qoq). The Group highlighted that higher sales volume from natural rubber given improved order from developing countries. Additionally, PBT margin was down by 18.1ppts resulted from higher operating cost due to lower utilisation rate despite lower raw material prices (natural latex prices: -8% qoq; nitrile latex price: -19% qoq). Utlisation rate ran at 55% during 1QFY22. Moving forward, the Group expects utilisation rate to run at 60% to 70% on the coming quarter given improved order from its customer mainly from the US as order is expected to recover in Dec’21/Jan’22.

Intense competition from new players added pressure to yearly growth performance. Revenue and PBT dropped 66.7% yoy and 91.6% yoy respectively during 1QFY22 on the back of normalising ASP coupled with subdued sales volume (sales volume for nitrile gloves: -49% yoy, natural rubber gloves: -13% yoy; ASP for nitrile gloves: -57% yoy, natural rubber gloves: -41% yoy). Current pricing for nitrile gloves is c.USD25-USD30 while c.USD24-USD26 for natural rubber gloves. Major decline has shown in nitrile gloves pricing given massive production from new players which led to market pricing continue to decline thus prompting customers to continue to be cautious on their order replenishment.

Hong Kong dual listing update. Management said that Top Glove’s shareholder has approved Top Glove’s Hong Kong Exchange (HKEX) listing plan during Extraordinary General Meeting (EGM) which has been conducted recently. The dual listing plan is expected to take place in early CY22. To recap, the Group has resubmitted the HKEX listing application after Oct’21 as progress had been muted for several months due to the US ban issue that hit the Group’s business operation.

Bleak outlook ahead. Looking forward, the Group believes ASP is in a transition period to move into pre-Covid-19 pricing level. Despite continued decline in nitrile glove and natural rubber glove pricing, Top Glove believes demand from surgical gloves to offset the decline in nitrile glove and natural rubber glove, benefiting from its diversified glove range that enable fast adaption to rapidly changing market. Additionally, the Group also deferred its expansion plan at this juncture in order to cope with the imbalance of global gloves supply and demand. Overall, we deem business outlook for Top Glove to remain challenging as ASP to continue to decline given pricing pressure from existing as well as new players. Moreover, we expect US order will take more time to recover amid current wait-and-see approach in replenish orders pursuant to continued downtrend in ASP.

Earnings Outlook/Revision

We slash our FY22F and FY23F net earnings forecasts by 64% yoy and 68.8% respectively to account for lower sales volume and ASP as well as additional tax from Cukai Makmur.

Valuation & Recommendation

Downgrade to SELL from HOLD with a lower target price of RM1.70 (RM2.74 previously) following our earnings downgrade. Our target price is now pegged at 15.3x FY22F PER of 11.1sen (30.8sen previously), higher than its 5-years -1 standard deviation of 8.7x. Our valuation is assigned to FY22F, considering the impact of earnings normalisation after exponential yet exceptional strong profit growth in FY21 pursuant to the pandemic.

Source: JF Apex Securities Research - 13 Dec 2021