• 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.

Source: Maybank Research - 10 Mar 2022