Challenging ASP Outlook; Downgrade Top Glove to SELL

• Top Glove's FY21 core net profit of MYR8.1b came in below our and consensus estimates. Management expects ASP to continue falling by -8% to -10% m-o-m in the coming quarters and will only stabilise in early 22.
• We lower our FY22/23 EPS forecasts for Top Glove by -75%/-53% after lowering our FY22/23 average ASP assumptions to US$25.5/21.4 per 1,000 pcs. We now value Top Glove at MYR1.68 on a lower 12.7x CY23 PER (-1 standard deviation of historical mean [from -0.5 standard deviation previously], in line with Hartalega).
• Downgrade Top Glove to SELL.

Top Glove Reported Weaker-than-expected FY21 Results

• Top Glove's 4QFY21 net profit of MYR608m (-48% y-o-y, -70% q-o-q) brought FY21 core net profit to MYR8.1b (+3.6x y-o-y), making up 79%/94% of our and consensus full-year estimates. The weaker-than-expected earnings performance was dragged by lower sales volume and utilisation rate as well as lower ASP of US$65/k pcs (vs. our assumption of US$73/k pcs).
• A final dividend of MYR0.054 was declared (FY21: MYR0.651, +452% y-o-y), translating into 66% dividend payout ratio.

4QFY21: Lower Sales Volume, Utilisation Rate & ASP

• Top Glove's 4QFY21 revenue declined by -49% q-o-q, -32% y-o-y on lower sales volume (- 20% q-o-q, -33% y-o-y) due to:
  1. the USA’s ban and seizure of its rubber gloves,
  2. lower blended ASP of US$48/k pcs (-31% q-o-q) and
  3. lower utilisation rate on National Recovery Plan 1 and EMCO.
• Lower utilisation rate on production disruption and steeper decline in ASP versus raw material costs have led to lower operating margin. 4QFY21 EBITDA margin reduced to 37.4%, from 64% in 3QFY21.

Earnings Adjustments

• Top Glove expects ASP continue to fall by 8-10% m-o-m in the coming months and will only stabilize in early 2022. The impact of falling ASP will however be cushioned by higher sales volume with the resumption of sales to USA effective from 10 Sep 2021.
• We lower our FY22/23 earnings forecasts for Top Glove by 75%/53% to factor in:
  1. lower blended ASP -46%/-35% in FY22/23. We now assume FY22/FY23/FY24 ASP of US$25.5/21.4/21.4 per ‘000 pcs and
  2. lower number of shares of 8,207m (-7%) after the suspension of its Hong Kong (HKG) listing.

Source: Maybank Kim Eng Research - 20 Sep 2021