Results

• Top Glove recorded a decrease in 3QFY23 revenue to RM530.6m, representing declines of 14.1% qoq and 64.5% yoy. However, net loss for the same period narrowed by 20.7% compared to the previous quarter. Nevertheless, there was a substantial decrease of 953.6% yoy in net loss, shifting from a profit of RM15.3m in the previous year.

• Not as expected. Top Glove achieved a revenue of RM1.78b for 9M2023, which accounted for 59% of our forecast and 54% of the consensus forecast. However, net losses for the same period exceeded both our forecast and the consensus forecast, reaching -RM463.5m.

• Narrowed QoQ. Net loss for Top Glove in 3QFY23 was reduced by 20.7% compared to the previous quarter's net loss of RM164.7m. This improvement can be attributed to an increase in Average Selling Prices (ASPs) of approximately 6% during the current quarter. However, revenue decreased by 14.1% qoq, primarily due to lower sales volume resulting from customers placing smaller orders due to shorter delivery times and intensified price competition. Also, operating loss was reduced by 2.6% to -RM139.1m as a result of higher ASPs.

• No Dividend declared. Top Glove did not propose any dividend for the 3QFY23, which aligns with our expectations for the full-year of FY23.

• Lower raw materials prices yoy... The year-on-year raw materials costs have decreased, with average price of natural concentrate experiencing a downtrend after easing 27% compared to the previous year. Additionally, average price of nitrile latex has also decreased by 17% year-on-year.

• … but higher qoq. On a quarter-on-quarter basis, average price of natural latex concentrate increased by 2%. Similarly, the average price of nitrile latex has seen a 7% increase compared to the previous quarter.

• The current cash balance for Top Glove stands at RM390.9m, representing a decrease of 10.6% compared to the cash balance of RM437.6m at the end of the previous fiscal year, FY22.

• Net gearing ratio is at 0.09x. When compared to its peers,Top Glove have a higher gearing among the industry players

Comments

• Inventory depletion. The management is optimistic that the decline in customers' inventory, coupled with the approaching expiry date of glove products, will provide the Group with an opportunity to maintain and continue to increase its ASPs. They believe that the imbalance between demand and supply in the market is gradually diminishing, indicating a positive outlook for the Group.

• Turnaround plan (T6). The Group has formulated a strategic plan known as the Top Glove Turnaround Plan (T6) consisting of six key points. These include initiatives to increase sales volume, improve product quality, consolidate facilities, enhance workforce productivity, strengthen cash flow position, and optimize the supply chain.

• Layoff of almost 1000 employees. In an effort to streamline operations and improve cost efficiency, Top Glove has implemented quality and cost optimization initiatives. As part of these measures, the company has reduced its workforce from 13,000 employees to 12,000 employees, resulting in the layoff of nearly 1,000 employees. Additionally, Top Glove has decommissioned certain production lines as part of its efforts to streamline operations and improve overall efficiency.

• Decommissioning of production lines. Top Glove faced the challenging task of decommissioning its obsolete production lines and implementing temporary production halts at 17 out of its 49 factories. This decision was made in response to the weakening global demand for gloves. As a result, the company's production capacity was reduced by 5 billion pieces, bringing it down to 95 billion pieces of gloves. This strategic move was necessary to align production levels with the prevailing market conditions and optimize operational efficiency.

Earnings Outlook / Revision

• We have adjusted our forecast for FY23F bottomline to - RM550.9m, which is a revision from our previous estimate of - RM120.2m. This revision is due to the current quarter's net loss exceeding our expectations. Additionally, we have lowered our forecast for FY24 net earnings to RM132.3m, anticipating a slower sales volume in the future due to higher average selling prices (ASPs) and the presence of unforeseen operating costs in a competitive market environment.

Valuation / Recommendation

• Maintained HOLD with a lower target price of RM0.89 (previously RM0.90) as we had revise our FY24F net earnings and revenue. This would give a downside of 8.5% from the current price of RM0.975.
   
• Our target price of RM0.89 is now pegged at 54x its FY24F EPS of 1.7 sen which is lower than 5Y +2 standard deviation of 59x PE but higher than its 5Y +1 standard deviation of 40x PE.
   
• We believe that the ascribed PE multiple is justified by its (i) current market share and its industry positioning, (ii) utilisation rate, (iii) T6 long-term growth plans, and (iv) financial performance.

Source: JF Apex Securities Research - 19 Jun 2023