Result

• Top Glove posted a net profit of RM15.3m during 3QFY22 which slumped 82.5% qoq and 99.2% yoy. Revenue inched up 1.1% qoq but down 64.8% yoy to stand at RM1.5b.

• As for 9MFY22, the Group’s net profit of RM288.5m was down 96% yoy on the back of normalisation of ASP.

• Below expectations. Top Glove’s 9MFY22 net profit of RM288.5m was below our in-house and market estimates which merely account for 42.4% and 54.8% of full year earnings forecasts respectively. The lower-than-expected earnings were dented by continuously upward movement of production costs which compressed the Group’s margin.

Comments

• Dismal QoQ earnings despite improvement in sales volume. The Group registered revenue growth of 1.1% qoq on the back of sales volume improvement. Sales volume improved by 6% mainly attributable to recovery in sales to the USA from Malaysia. The management guided that the sales to USA continue to show rising trend with an increase of 8% qoq. However, margin pressure persists with PBT margin down by 5.1ppts yoy resulted from ascending of production costs. This was mainly due to the inflationary pressure resulted from Russia-Ukraine conflict which drove up the crude oil prices as well as the introduction of RM1500 minimum wage by the Malaysian Government which came into effect 1 May 2022. In addition, continuously spike in natural gas and electricity tariffs further hurt the Group’s margin.

• Unable to pass through cost amid oversupply situation. On YoY, revenue was down by 64.8%. The huge downward scale in revenue was due to comparison with higher base in which the corresponding period (3QFY21) was at the peak of COVID-19 pandemic. On the other hand, PBT margin was not out of the blue, plunged by 59.9ppts amid escalating costs resulted in margin compression. The Group was unable to fully pass on the cost through amid the ongoing oversupply situation.

• Updates on the business. (I) Currently, the Group did not face any labour shortage issue as the current production capacity is only at 50%. (II) The Group has deferred some expansion plans to align with demand and supply situation (deferred 9 billion pieces in production capacity for CY2022). (III) The Group will switch its capacity expansion focus to upstream expansions such as in-house raw material supply and gamma sterilization plant to reduce dependency and improve cost and operational efficiency. (IV) The current quarter gloves mixture ASP is USD25/1000pcs. The management commented that ASP is expected to continue trending downward, with 2-3% downward adjustment expected in the coming quarter or by worst drop below the pre-pandemic level due to oversupply situation. (V) The Group is launching its Sustainability Policy on 15 June 2022 with several targeted goals on sustainability. (VI) Dato’ Lee Kim Meow, the Group’s Managing Director will be designated to Non Executive Non Independent Director by end of 31 July 2022 and Mr. Lim Cheong Guan will be succeeded to his role from 1 August 2022.

• Outlook remains challenging. Moving forward, the Group expects the challenging business environment to persist in the near term. It expect the orders from US will take on its upward momentum, thus margin compression would be relieve if materialize. However, we are aware of several long persisting factors such as higher crude oil prices, new minimum wage implementation, and increase in natural gas and electricity prices will put pressure on its margin. The management also guided that cost past through mechanism will be challenging due to supply-demand imbalance. Overall, we deem business outlook for the Group to remain gloomy amid the oversupply situation as well as normalisation of ASP, even in slower pace. We foresee the continued strong market competition from major player to continue to dampen the ASP upward momentum.

Earnings Outlook/Revision

• We slash our FY22F and FY23F net earnings forecasts by 44.2% yoy and 10.7% respectively to account for higher operating cost and lower ASP amid oversupply condition.

Valuation & Recommendation

• Maintain SELL with a lower target price of RM1.10 (RM1.50 previously) following our earnings downgrade. Our target price is now pegged at 22x FY23F PER of 5sen (8.3sen previously), which is lower than its 5-year mean PE of 23.2x.

Source: JF Apex Securities Research - 10 Jun 2022