• Maintain SELL, new MYR0.60 TP from MYR1.42, 16% downside. Following the continued normalisation of ASPs and an increase in costs from the global inflationary environment, Top Glove ended the year with its first ever loss-making quarter since its listing in 2001. While ASPs are approaching the bottom, we think the outlook remains gloomy due to the oversupply situation, as TOPG’s current utilisation stand at only c.45%. This report marks the transfer of coverage to Oong Chun Sung.
• FY22 results below expectations. 4Q22 core loss of MYR24.7m brought FY22 core profit to MYR404m (-95% YoY) – below expectations at 64% of our estimates but 34% above the consensus’ estimates, mainly due to the adjustment of inventory write down amounting to MYR229m. On a full-year basis, sales volumes and ASPs declined by 25% and 59%, as the industry struggles with the oversupply situation. On the cost side, 4QFY22 saw the full impact of the higher minimum wage, and the natural gas tariff rose 10% QoQ (60% increase in FY22). No dividend was declared for the quarter.
• ASPs still moderating. In 4Q22, blended ASPs declined by 5.4% QoQ to USD24/1000 pcs, with the QoQ decline trend continuing to moderate. Encouragingly, raw material prices are also on a declining trend due to lower production and deferred capacity by glove makers. However, TOPG continues to see lower demand across all regions, due to excess stockpiling by customers. Despite the lower sales volumes, the group revealed that it raised ASPs by 5% in October to begin passing through the increased costs, at the risk of sacrificing market share.

• Deferred capacity. In view of the low utilisation levels (c.45%), TOPG is deferring all capex for new capacity in 2023, ahead of plans to add 4bn pcs pa in 2024 and 11bn pcs pa in 2025. Instead, a FY23 budget capex of MYR470m will be utilised for ongoing constructions and refurbishments of existing facilities, enhancing in-house supply, and construction of a hostel that can accommodate 2,000 workers upon completion in Dec 2022.

• Earnings revision and valuation. We cut our FY23 and FY24 revenue estimates by 16% and 14% to factor in lower utilisation rates and delayed capacity expansion. We cut our earnings estimates for FY23 and FY24 by 40% and 36% in view of higher raw material costs. Despite the loss-making quarter, we believe TOPG will remain profitable in FY23 as ASPs bottom out, and demand should pick up once customer inventory is depleted. We changed our valuation methodology to DCF from PE-based. Our TP incorporates a 0% ESG premium/discount, based on TOPG’s 3.0 score.

• Key risks. Further deterioration in ASPs, deferment on capacity expansion plans, higher-than-expected raw material prices.

Source: RHB Securities Research - 21 Sept 2022