• Still NEUTRAL, higher MYR0.93 TP (DCF) from MY0.80, 3% upside. 1QFY24 (Aug) core loss narrowed QoQ – we deem this above our and Street’s expectations. Sales volumes to developed countries continue to show positive QoQ improvements as glove inventory levels are approaching their shelf life end. We remain cautious on the cost-passthrough mechanism implementation, given that the industry is piled up with supply capacity abundance. Our TP incorporates a 2% ESG premium, given Top Glove Corp’s inclusion in the Dow Jones Sustainability Index.

• Results overview. 1QFY24 core loss narrowed QoQ and YoY to MYR57m. We deemed the results as above expectations vs our and Street’s estimated FY24 losses of MYR41m and MYR53m. This was on better-than-expected sales volumes and cost efficiencies due to better utilisation. The sequential improvement was attributed by improving sales volumes (+9% QoQ) and ongoing cost optimisation efforts (core EBITDA turned positive for two consecutive quarters). On the flip side, ASP was lowered by 8% QoQ to USD20/1,000 pieces whereas raw material prices – ie natural latex (NL) and acrylonitrile butadiene rubber (NBR) – were higher by 11% and 4% QoQ while the natural gas tariff was lowered by 8%.

• Softer ASPs. The sequentially lower ASPs were attributed to a reflection of lower raw material costs as TOPG translated cost savings to customers. Having said, the ability to implement cost pass-throughs remains crucial, given that average NL and NBR prices were 10-4% higher during the last two months of 2023 vs TOPG’s recent financial quarter ended November. Gas tariffs are expected to increase by 3% during the next tariff review in Jan 2024 on higher natural gas prices in 4Q23.

• Moving forward, we see the favourable cost outlook and plant decommissioning exercise providing headroom for margins expansion in the coming quarters. We retain our view that demand will pick up meaningfully by 2HCY24, as client inventory levels continue to deplete and glove inventory levels (stockpiled since 2020) approach expirations (typical shelf life: 3-5 years). Conversely, current industry-blended ASPs (4QCY23) are said to be lower marginally at USD19-20/1,000 pieces, as the cost passthroughs appear challenging in view of the easing of raw material prices. That said, the ability to fully translate higher costs to customers remains a key re-rating catalyst before we can upgrade our current call.

• Earnings revision and valuation. We now expect a narrow loss for FY24 of MYR12m from -MYR41m previously after taking into consideration the favourable cost outlook offset by challenges in raising ASPs. Our DCFderived TP is raised to MYR0.93. Key upside/down risks include higher- /lower-than-expected ASPs, capacity expansion deferment/acceleration, and higher-/lower-than-expected raw material prices, among others.

Source: RHB Securities Research - 21 Dec 2023