We maintain our HOLD call on Top Glove Corporation (Top Glove) with a lower fair value (FV) of RM0.88/share (from RM1.08/share) with a target FY24F PE of 27x. This is pegged to 2 standard deviation below its FY18–FY19 pre-pandemic median of 31x given the ongoing normalisation of average selling prices (ASP). There is no ESG-related FV adjustment based on our unchanged 3-star rating.
Following a recent company meeting, we further reduce our net profit estimates for FY22F by 16%, FY23F by 18% and FY24F by 28% on lower average selling price (ASP) projection of US$24/1000 pcs from 4QFY22 to FY24F vs US$25/1000 pcs previously.
We believe that ASPs could still experience downward pressure albeit at a slower rate. The company attributed this to the challenge in passing higher operating costs to customers, stemming from inflationary pressures triggered by ongoing supply disruptions, worker recruitment hurdles and recent minimum wage hikes, against the backdrop of structural over-capacity which is likely to be aggravated by the risk of inventory clearance as smaller players exit the market.
Recall that the company’s 3QFY22 earnings plummeted 71% QoQ to RM29.3mil despite flattish revenue, owing most of its net income to unrealised foreign currency translation gains. Hence, we are projecting that the group will incur a 4QFY22 loss of RM28mil due to declining ASPs coupled with low plant utilisation rates, which considerably narrow margins and lead to below break-even levels.
Based on our sensitivity analysis, we estimate the group’s breakeven ASP at USD23/1000pcs. From our base case assumption of 27bil gloves at USD25/1000pcs, we estimate that FY23F net profit diminishes by RM98mil with a US$1 drop in ASP and RM30mil for every 5bil-pc reduction in sales volume (Exhibit 1).
We do not expect a significant increase in orders for gloves in 4QFY22 and 1HFY23 given high customer inventories presently along with a tightly competitive market as plant utilisation rates continue around 50-60%. Meanwhile, the group deferred capacity expansion plans over the past 2 years to align with the current market condition.
Given the pressure on ASP, we are negative on the group’s near-term profitability prospects despite its solid cash position. Even so, management believes demand for gloves will stay relevant under the new normalised post-pandemic world, which will partly cushion falling ASPs. This could be supported by the group’s diverse glove range and product mix, which allow for quick adaptation to changing market demand.
The stock currently trades at a premium FY23F PE of 46x, above its pre-pandemic level of 31x.
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