• Top Glove started off FY23 (Sep 2022 to Aug 2023) with another consecutive loss-making quarter since 4QFY22, no thanks to the ongoing demand-supply imbalance, which led to slow order replenishment by customers.
• While the ASP normalisation trend continues to taper off, we expect headwinds such as escalated gas tariffs and subdued industry utilisation rates to continue to weigh on Top Glove’s profitability in the near term.
• Our target price for Top Glove price incorporates a 0% ESG premium/discount.

Top Glove's 1QFY23 Results Below Expectations

• Top Glove's 1QFY23 core loss widened to MYR134m from a core profit of MYR174m a year ago. Result came in significantly below our and consensus’ estimates, on the back of ongoing softness in ASPs, and lower sales volumes as the industry struggles to find equilibrium.
• Core loss has been adjusted for inventory write-down of MYR11.4m vs MYR56m in 4QFY22 as Top Glove takes precautionary steps to examine its inventory level against the current challenging market environment.
• No dividend was declared by Top Glove for the quarter as management said its priority was to conserve as much cash as possible.

ASPs Still Moderating

• In 1QFY23, blended ASPs declined 8% q-o-q to US$22/1000 pieces, with the q-o-q decline trend continuing to moderate. Encouragingly, natural latex concentrate and nitrile latex prices continued to trend lower by 7% and 49% y-o-y, offset by a spike in gas tariffs.
• 1QFY23 utilisation rate tumbled to 30% from ~50% in 4QFY22 on customers’ lack of urgency to place orders, in light of excess production capacity within the glove industry. In view of this, the implementation of cost pass-through remains challenging at this juncture.

Top Glove – Outlook

• Latest nitrile and latex ASPs slipped further to US$17-19 and US$17-22 from US$22 and US$20-25 in 4QFY22. That said, current ASPs are on par with pre-pandemic levels, suggesting limited further risk of price erosion.
• Nevertheless, utilisation rate deteriorated further to 30-40% in November from 50% in September, due to the absence of customer demand as customers carry six months of inventory on hand.

Top Glove – Earnings Forecast and Valuation

• We cut our FY23 and FY24 revenue estimates for Top Glove by 18% and 16% to factor in lower utilisation rates. Our FY23 and FY24 earnings estimates are cut to MYR43m-MYR168m from MYR348m- MYR428m in view of higher gas tariffs and a weaker topline.
• Despite a loss-making 1QFY23, we expect demand to gradually pick up by 2H23 after client inventory depletes – Top Glove should at least achieve breakeven by FY23.

• Our DCF-derived target price for Top Glove incorporates a 0% ESG premium/discount, based its 3.0 score, which is in line with the country median.
• Keep SELL rating for Top Glove with lower MYR0.57 target price from MY0.60, 27% downside.
• Key risks. Further deterioration in ASPs, deferment on capacity expansion expected raw material prices.

Source: RHB Invest Research - 15 Dec 2022