TOPGLOV’s 1QFY24 results met our forecast but beat market expectations. It reported a net loss of RM58m but should turn profitable in coming quarters on lower input costs. Nonetheless, massive overcapacity continues to weigh on the sector’s outlook. We maintain our forecasts, TP of RM0.75 and UNDERPERFORM call.

TOPGLOV registered a sixth consecutive quarterly loss in 1QFY24 with a net loss of RM58m, compared to our full-year net profit forecast of RM40m and the full-year consensus net loss estimate of RM53m, respectively. We consider the results within our forecast but beat market expectations as we expect it to turn profitable in coming quarter on lower input costs.

QoQ, its 1QFY24 revenue rose 4% due to a higher sales volume (+9%) which more than offset lower ASP (-8%). Its EBITDA returned to the black at RM21m compared to a loss of RM380m previously due to: (i) the absence of a RM388m impairment loss from the decommissioning of production facilities, (ii) a lower natural gas price (-8%), and (iii) sustained poor economies of scale/cost absorption as its utilisation rate hovered at a depressed level of 30%. At the net level, its 1QFY24 losses narrowed to RM57m compared to RM463m in 4QFY23. No dividend was declared in this quarter as expected. YoY, its 1QFY24 revenue fell 22% due to a lower ASP (-11%) and sales volume (-17%). This resulted in a 1QFY24 net loss of RM58m compared to a profit of RM168m in 1QFY23.

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

1. The group continues to see MoM uptrend in sales volume and expect customers’ replenishment activity to pick up in subsequent quarters, underpinned by inventory rebuilding from distributors, indicating early signs of potential recovery in demand. It has seen sales order rising 30%-40% MoM. The group is of the view that current uptick in demand is due to depleting customers inventory rather than rising COVID-19 cases. However, we expect volatile quarterly sales order as distributors or buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.
    
2. Moving into 1HCY24, we expect input latex price to rise because of low production during the wintering months (between Dec till May), while nitrile butadiene rubber prices have moved up since 4QCY24. On a brighter note, natural gas (3QCY23: -17% QoQ) which accounts for 15%-20% of total cost has eased. Overall, all players are mindful that the prospect of raising ASP further in subsequent quarters is challenging due to the current massive overcapacity situation, with only a handful of customers agreeing thus far. However, due to the current competitive pressure emanating from massive oversupply and low industry utilisation averaging 40%, customers can walk away and choose to buy from other players whenever there is an attempt to raise prices. Case in point, buyers can turn to Chinese manufacturers which are still selling below USD20 per 1,000 pieces, at USD16−18 per 1,000 pieces.
    
3. It has earmarked lands for sale totalling RM420m in light of the softer global glove demand. Specifically, TOPGLOV is close to selling RM220m worth of land, expected to be completed somewhere in FY24.

Outlook. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. On the supply side, we are now factoring in a reduction of 20b pieces of gloves in the system by endCY24 as we gathered from channel checks that new or existing smaller players have exited. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24.

Forecasts. Maintained.

We reiterate our UNDERPERFORM call and our TP of RM0.75 based on 1.3x FY24F BVPS, at a 40% discount to the sector’s average of 1.7x seen during the last downturns in 2008-2011 and 2014-2015 as we believe the current downturn could go down in history as one of the deepest ever. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Key risks to our recommendation include: (i) certain Chinese glove giants stop predatory pricing practices (i.e. selling below cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii) stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii) industry consolidation reducing competition among players, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 21 Dec 2023