Kenanga Research & Investment

Top Glove Corporation - A Third Consecutive Quarterly Loss

Publish date: Fri, 17 Mar 2023, 05:15 PM

TOPGLOV’s 1HFY23 results disappointed due to lower-than expected sales volume. The group reiterated that the challenging and competitive business landscape will persist throughout 2023. We widen our FY23F net loss by 26% to RM450m (from RM356m) but keep our FY24F net profit unchanged. We trim our asset-based TP slightly to RM0.58 (from RM0.60) and reiterate our UNDERPERFORM call.

TOPGLOV disappointed with a third consecutive quarterly loss, registering a net loss of RM333m in 1HFY23 compared to our full-year net loss forecast of RM356m and the full-year consensus net loss estimate of RM303m. The variance against our forecast came largely from weaker-than-expected sales volume and higher-than-expected cost.

QoQ, 2QFY23 revenue fell 2% due to lower average selling price (ASP) (-4%) which was offset slightly by higher sales volume (+6%). At EBITDA level, it plunged to a loss of RM54m compared to RM62m in 1QFY23 due to: (i) excessive industry capacity leading to reluctance of customers to commit to sizeable orders and hold substantial stocks on expectations of further price decline, (ii) margin erosion as costs remains elevated including natural gas and electricity tariff and labour costs against falling selling prices (ASP/1,000 pieces of USD19-21 vs. cost which we estimate to be USD21-23 per 1,000 pieces), and (iii) reduced economies of scale, particularly, poor cost absorption, as its utilisation rate continues to remain weak at 35% compared to 30% in 1QFY23. As a result, 2QFY23 losses came in at RM165m compared to RM168m in 1QFY23. No dividend was declared in this quarter as expected. YoY, 1HFY23 revenue fell 60% due to lower ASP (-28%) and volume sales (-49%) bringing 1HFY23 losses to RM333m.

The key takeaways from the analyst briefing yesterday are as follows:

1. TOPGLOV believes that the rate of decline in ASPs has bottomed out and is trying to raise ASP by 5%-10% to USD21 per 1,000 pieces for Mar to April shipments. However, clients may push back as we gathered from sources that Chinese players are selling lower at USD17 per 1,000 pieces.

2. There has been an uptick in orders for the Mar and Apr deliveries, potentially boosting its 3QFY23 utilisation rate to 40% from 35%. There are also signs of buyers returning as stocks are depleting at their customers’ warehouses due to products approaching expiration dates. However, we are uncertain if this is sustainable given the massive industry overcapacity with buyers generally still reluctant to place sizeable orders or hold substantial stocks on expectations of further decline in prices. Moreover, the higher sales volume in 2QFY23 could be partly due to a lumpy order from a certain client which accounts for 5%-8% volume sales.

3. TOPGLOV reiterated that a challenging and competitive business landscape will persist through 2023 and only expect to return to the black in 9 to12 months. Specifically, the group hope to turn EBITDA positive in 3QFY23 and break even or return to the black from 4QFY23.

Source: Kenanga Research - 17 Mar 2023

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