• Top Glove’s 1QFY22 (Sep 2021 to Nov 2021) net profit of MYR186m was below our and consensus full-year estimates. Management expects ASP to continue falling but at a slower pace. It remains cautious and will defer some of the expansion plans.
• We lower our FY22/23/24 earnings per share forecasts by -27%/-5%/-4%. We now value Top Glove at RM1.61 on an unchanged 12.7x CY23 PER. Maintain SELL call on Top Glove.

Top Glove's 1QFY22 Results Below Expectations

• Top Glove's 1QFY22 net profit of MYR186m (-92% y-o-y, -59% q-o-q) accounted for 15%/11% of our and consensus full-year estimates. We attribute the weaker-than-expected earnings performance to lower-than-expected sales volume and utilisation rate as well as ASP. Also, the earnings gap was caused by the inclusion of prosperity tax in 1QFY22.
• A first interim dividend of RM0.012n has been declared by Top Glove (-93% y-o-y) in 1QFY22.

Highlights From Top Glove's 1QFY22 Conference Call

• Top Glove's 1QFY22 revenue declined by -24% q-o-q, -67% y-o-y on:
  1. lower sales volume (-0.4% q-o-q, -34% y-o-y%) especially for nitrile and vinyl gloves due to rising competition,
  2. lower blended ASP of US$32/k pcs (-33% q-o-q; vs our ASP assumption of US$34/k pcs for 1QFY22) and
  3. lower utilisation rate of 55%.
• Lower utilisation rate and steeper decline in ASP versus raw material costs have led to lower EBITDA margin of 21% (-49ppt y-o-y, -12ppt q-o-q).
• Top Glove expects ASP to continue to fall but at a slower pace. The impact of falling ASP will however be cushioned by higher sales volume with improving sales order from the USA and lower raw material prices (nitrile latex price has declined by 47% since Sep 2021).

Earnings Adjustments

• We lower our FY22/23/24 earnings forecasts for Top Glove by -26.7%/-4.6%/-4.1% to factor in:
  1. lower blended ASP -4%/-1%/-1% in FY22/23/24. We now assume FY22/FY23/FY24 ASP of US$24.4/21.2/21.2 per k pcs; and
  2. prosperity tax.
• We have not factored in additional number of shares of up to 794m from its Hong Kong listing, which is slated to be completed by early 22. The additional shares could dilute our earnings per share estimates by 9%.

Source: Maybank Kim Eng Research - 12 Dec 2021