• Maintain SELL and MYR1.42 TP, 15% downside and c. 2% yield. 1HFY22 (Aug) earnings came below our and Street’s expectations on the mismatch of ASP normalisation against the milder downtrend in raw material prices. While Top Glove has begun discussions to pass on cost pressures, we are less optimistic on a complete pass-through given the heightened competition in the market.

• 1H22 net profit came below expectations. 2Q22 core net profit of MYR91.5m (-47% QoQ, -97% YoY) brought 1H22 numbers to MYR265m (-95% YoY) or 43% and 28% of our and ’ estimates. The negative deviation was mainly attributed to the mismatch of ASP normalisation against the milder downtrend in raw material prices. On a sequential basis, earnings fell due to normalising ASPs but were slightly offset by higher sales volumes. No dividend was declared for the quarter.

• ASPs approach bottom. For 2Q22, nitrile and natural rubber glove prices declined 26% and 18% QoQ to USD28.00 and USD24.00/1,000 pieces. Management said nitrile glove prices are hovering at USD25.00 while latex gloves range between USD22.00 and USD27.00. Positively, conversations surrounding cost pass-throughs have gained traction among its customers, as TOPG looks to raise ASPs from hereon. We are less upbeat on a complete pass-through given the heightened market competition.

• TOPG has postponed its dual primary listing on the HKEX, citing volatility in current equity market conditions. We are positive on this – we previously deemed the fund-raising exercise as unnecessary as the company’s current utilisation rate provided poor justification for further expansion. Additionally, TOPG possessed ample gearing headroom to support its capex plans – net cash is currently at MYR880m excluding perpetuals.

• Rising raw material prices. 2Q22 latex concentrate and nitrile butadiene rubber (NBR) prices stand at MYR5.60 (+10% QoQ) and USD1.15/kg (-36% QoQ). Moving forward, we expect prices to rise for both components, given higher crude oil costs and a continuing wintering period. Market latex concentrate and NBR prices now: MYR6.30 and USD1.28/kg.

• Sales volumes rose 10% QoQ on increased sales to the US due to restocking activities, which in turn was prompted by ASPs reverting to pre- pandemic levels. Management expects margins to maintain moving forward despite cost headwinds – ie raw material, utilities, and labour – on higher utilisation rates and efforts to pass on costs to customers. The utilisation rate stands at 76% based on operational capacity.

• We cut our FY22F-24F earnings by 19%, 4%, and 4% after revising upwards our production cost assumptions in light of the upward pressure on raw materials, utilities, and labour. Keep SELL and MYR1.42 TP. We changed our valuation methodology from DCF to apply 18x 2023 P/E – in line with its 10-year mean – as we no longer expect TOPG to report windfall earnings. As the ESG score is in line with country median, we ascribe a 0% ESG discount/premium to our TP.

Source: RHB Research - 10 Mar 2022