• Maintain NEUTRAL, with new DCF-derived MYR0.80 TP from MY0.84, 6% upside. Top Glove Corp’s core loss narrowed QoQ to MYR86.3m in 4QFY23 (Aug) bringing the FY23 number in line with our and Street expectations. Notwithstanding the challenges ahead, management guided that it will strive to improve operating efficiency while remaining committed to uphold ESG practices following its inclusion in the Dow Jones Sustainability Index for five consecutive years. Our TP incorporates a 2% ESG premium.

• Results overview. 4QFY23 core loss narrowed QoQ to MYR86.3m bringing its FY23 core loss to MYR509m (after adjusting for a MYR388.5m asset impairment arising from a decommissioning exercise) in line with our and consensus estimates. The sequential improvement in core loss was attributed to cost optimisation efforts as EBITDA (after adjusted for a one-off item) began to turn positive this quarter. On the flip side, ASP fell by 0.5% QoQ to USD20/thousand pieces, whereas volume sold declined 9.5% QoQ given customers still refuse to commit to bulk orders as the demand-supply dynamics remain imbalance.

• Key operating metrics. The sequential lower ASP was attributed by a reflection of reduced raw material cost as TOPG translated cost savings to customers. That said management is of the view that ASP could potentially increase in 1QFY24 to reflect higher key raw material prices (latex and acrylonitrile prices were 3-5% higher in September vs August). Nevertheless, the company will still need to assess price sensitivity of its customers before making any price adjustment. Gas tariff is expected to decline by a further 5% from -11% (tariff review in July) on the back of softer natural gas prices.

• Outlook. Moving forward, we expect with the plant de-commissioning exercise to offer some respite to TOPG given the obsolete plants are less manpower and energy efficient. As demand continues to be choppy in the near term, we now expect meaningful recovery to only happen by 2H24, as the inventory destocking pace comes in slower than expected. We believe key concerns among investors continue to be underpinned by the consistency of clients’ orders, price competition with Chinese peers as well as any punitive measures arising from a spike in minimum wages.

• Earnings revision and valuation. We lower our FY24F-25F core loss by 4% to 2%, taking into consideration the challenges in raising ASPs as customers continue to be price sensitive. Our DCF-derived TP is lowered to MYR0.80 after we incorporate a higher beta (1.4 from 1.1) in view of the heighten systematic risk within the gloves sector.

• Key risks. Higher/lower than expected ASPs, deferment/acceleration on capacity expansion plans, higher/lower-than-expected raw material prices, stronger/weaker-than-expected USD.

Source: RHB Securities Research - 9 Oct 2023