Investment Highlights

• We maintain our HOLD call on Top Glove Corporation (Top Glove) with an unchanged fair value (FV) of RM0.60/share. This is pegged to a target FY24F PE of 27x, 2 standard deviation below its FY18-19 pre-pandemic median of 31x given the average selling price (ASP) uncertainty amid elevated operating costs. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• Our forecasts are maintained following an analyst briefing yesterday. These are the salient highlights:
  • The company’s 4QFY22 average glove ASP declined by 59% YoY and 5.4% QoQ to US$23.5-24.5/1K pcs. The QoQ decline was from all types of gloves, except for surgical gloves (+4%). The stable demand for surgical gloves was underpinned by the resumption of elective surgeries in the healthcare sector amid easing travel restrictions measures.
  • The QoQ decline in ASP for nitrile (-10%) and natural rubber (-6%) gloves stemmed mainly from continued pricing pressure from Chinese and Thailand competitors. This was aggravated by glove makers who are exiting the industry, offering ASPs at an exceptionally low level for the purpose of inventory clearance.
  • Against the backdrop of declining ASP, Top Glove has written down its inventory value to net realisable value by RM229mil in FY2022 and RM56mil for 4QFY22. Top Glove guided that the write-downs was mainly related to the ASP downtrend, and expects minimal chances for additional write-downs in coming quarters as long as prices remain stable.
  • On a positive note, Top Glove claimed that the lower quantum of QoQ ASP decline in 4QFY22 indicates that the downtrend possibly could have bottomed out. This is supported by the current landscape whereby most of its competitors have been selling at below cost in recent months. Hence, as the largest local glove maker, Top Glove took the lead to increase the ASP by 5% in Oct this year in order to reinitiate the cost-plus mechanism practiced during the pre-pandemic period. Top Glove opined that its peers could follow suit.
  • However, we think it is still too early to conclude that the ASP down-cycle has come to an end. Despite Top Glove’s 4QFY22 ASP at US$23.5-24.5/1K pcs, its plant utilisation rate (PU) was just 30-40% vs. 51% in 3QFY22 and 85-90% during pre-pandemic period. In comparison, the current average glove industry PU is 50% or below (vs 80-85% in pre-pandemic era). Hence, we believe the 5% increase in Oct may not be recurring over the coming months.
  • The group’s glove sales volume decreased by 25% YoY and 35% QoQ. The higher quantum of QoQ decline, in tandem with the shockingly low PU in 4QFY22, suggests that end-customers are still sitting on excess inventories. Hence, we do not expect a significant increase in orders for gloves over the coming quarter. Top Glove expects its customers to only replenish in another 6 months, which is quite aligned with Hartalega’s guidance.
  • In view of the current global overcapacity, Top Glove decided to further defer its expansion plan by 26% from a total annual capacity of 156bil to 115bil in CY25. While our forecasts have now incorporated the lower total annual installed capacity, the impact to earnings were neutralised by higher PU rate assumptions.
• The stock currently trades at a FY24F PE of 32x, which is at parity to its FY18-19 pre-pandemic median of 31x. However, we believe this is at a premium given that ongoing challenges remain unabated while the company does not offer any FY23F dividend yield given our projected loss.

Source: AmInvest Research - 21 Sept 2022