TOPGLOV’s FY22 results disappointed due to lower-than-expected ASP and sales volume. Amidst the industry downturn, it has deferred its expansion plans and embarked on rationalisation initiatives. It expects the industry to turn the corner from 2H 2023, which is more optimistic than our view of 2024. We cut our FY23F net profit by 33%, reduce our TP by 8% to RM0.60 (from RM0.65) and reiterate our UNDERPERFORM call.

Its FY22 net profit missed our forecast and consensus estimates by 22% and 21%, respectively. The variance against our forecast came largely from the weaker-than-expected ASP and sales volume.

Its FY22 revenue fell 66% due to lower ASP (-59%) and volume sales (- 25%). EBITDA plunged by a sharper 93% due to: (i) we believe, aggressive pricing to reduce inventory (to boost cash flow), and (ii) weaker economies of scale from a lower production volume, manifested in the continued decline in utilisation to about 60% from 70-75% a year ago. TOPGLOV did not declare a dividend for the quarter vs. our assumption of 2.0 sen.

The key takeaways from the analyst briefing yesterday are as follows:

1. The group highlighted that it is raising its ASP by 5% to an estimated USD21-USD22/1,000 pieces (compared to our FY23F assumption of USD20/1,000 pieces) in order to mitigate rising production cost. We believe this could hurt sales volume considering the persistent oversupply situation at present.

2. It has deferred its expansion plans in 2023 for an additional 10b pieces/annum which could have raised its capacity by 10% given the depressed utilisation of only about 50% across the industry at present.

3. It has embarked on initiatives to boost operational efficiency and rationalise costs to mitigate the impact from the topline contraction including internal mobility from manufacturing to surgical glove sterilisation and chemical divisions, as well as active mobilisation of foreign labour between plants to reduce idle time.

4. It expects the industry to turn the corner from 2H 2023 which is more optimistic as compared with our view of 2024 based on our demand and supply projections.

Outlook. We expect ASP to remain in the doldrums in 2H 2022. As a result of massive capacity expansion by incumbent players as well as new players influx during the pandemic years — enticed by the then super fat margins that had eventually evaporated — we estimate that the global glove manufacturing capacity has jumped by 22% to 511b pieces in 2022 (see chart on the following page). On the other hand, as more countries come out the other end of the pandemic, we project the global demand for gloves to ease by 10% in 2022 to 387b pieces (partly also due to the destocking activities along the distribution network). This will result in an excess supply of 124b pieces (assuming, hypothetically, capacity utilisation is maximised).

In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% to 595b pieces (as more capacity planned during the pandemic years finally comes on-line) while the global demand for gloves resumes its organic growth of 15% annually (taking our cue from MARGMA’s projection of 10-15% growth in global glove demand yearly), resulting in the excess supply rising further to 150b pieces. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Our FY23F net profit is downgraded by 33% as we reduce ASP to USD20 from USD21 per 1,000 pieces and utilisation from 65% to 60%. We also introduce FY24F numbers into our earnings model.

We rationalise our valuation basis to asset-based (from earnings-based previously) as we believe its earnings will remain depressed at least over the next 12-18 months. We reduce our TP by 8% to RM0.60 based on 0.9x FY23F BVPS, at a 50% discount to the sector’s average of 1.7x during the last downturns in 2008-2011 and 2014-2015 as we believe the current downturn could be one of the deepest ever. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3). Maintain UNDERPERFORM.

Key risks to our recommendation: (i) The industry turning the corner sooner on stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (ii) Industry consolidation reducing competition among players, and (iii) epidemic and pandemic occurrences.

Source: Kenanga Research - 21 Sept 2022