Top Glove’s 2QFY22 net profit of MYR87.5m was below our and consensus full-year estimates. Management expects margin outlook to stay challenging on rising raw material costs, partially cushioned by better utilisation and efficiency rates.
Top Glove remains cautious and has scaled back on its expansion plan. It has also put its Hong Kong listing plan on hold for now.
We lower our FY22/23/24 earnings forecasts for Top Glove by -40% to -48%. Post earnings adjustments, our target price for Top Glove is lowered to MYR0.91 (on an unchanged 13x CY23 PER). Maintain SELL.
Top Glove's 2QFY22 Profit More Than Halved Y-o-y and Q-o-q
Top Glove's 2QFY22 (Dec 2021 to Feb 2022) net profit of MYR87.5m (-97% y-o-y, -53% q-o-q) lifted 1HFY22 (Sep 2021 to Feb 2022) net profit to MYR273m (-95% y-o-y), accounting for just 30%/34% of our and consensus full-year estimates.
We attribute the weaker-than-expected earnings performance to lower utilisation rate (60% vs our assumption of 75%) and higher-than-expected raw material costs. The sharp y-o-y decline in 1H22 earnings was due to lower ASP and utilisation rate as well as the inclusion of the prosperity tax.
Highlights From Top Glove's 2QFY22 Conference Call
Despite the 16% q-o-q decline in blended ASP to US$27/k pcs, Top Glove's 2QFY22 revenue just declined by -9% q-o-q thanks to higher sales volume (+10% q-o-q) and better utilisation rate of 60% in 2QFY22 (from 50%+ in 1QFY22). Nevertheless, Top Glove's 2QFY22 net profit declined sharply mainly due to higher raw material costs. As a result, EBITDA margin was down -57ppt y-o-y and - 8ppt q-o-q to 13.3%.
Top Glove expects sales and utilisation rate to improve in the coming quarters as customers’ restocking activities are gaining momentum. Higher utilisation (76% in Mar 22) and efficiency rates should help to cushion the impact from higher raw material prices.
Top Glove - Earnings Adjustments
We lower our FY22/23/24 earnings forecasts for Top Glove by -44.7%/-40.4%/-47.7% to factor in:
lower utilisation rate of 66%/75%/75% (from 73%/80%/80%) for FY22/23/24,
higher electricity, gas and labour costs and
slower capacity expansion while maintaining our FY22/FY23/FY24 blended ASP of US$24/21/21 per k pcs.
We have not factored in additional number of shares from its Hong Kong listing, which has been put on hold for now.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....