• We maintain our SELL 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 20x, at parity to its 10-year average. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• According to Oriental Daily News, yesterday at 5pm, there was a serious fire outbreak at Top Glove factory in Lukut, Negeri Sembilan. The fire began in the production unit located in Block A and quickly spread to the whole factory, leading to the destruction of 60% of the factory space of 100 x 100 sq feet. The firefighters took 3 hours to extinguish the fire. Fortunately, none of the 500 workers were injured. Yet, large quantities of equipment and rubber gloves were destroyed (Exhibit 2).

• According to Top Glove, the entire capacity of Lukut factory is 3.2bil pcs/annum (or 3.2% of group’s 100bil pcs/annum), while the affected capacity is 1.2bil pcs/annum. With the group’s 2QFY23 plant utilisation rate (PU) at only 27%, we estimate that the Lukut factory could have contributed 10% of 2QFY23 group revenue, based on an assumption of optimal PU at 85% as management would chose only the most efficient plants to operate under the current supply-demand imbalance.

• Assuming all Lukut factory shipments in Apr 2023 were destroyed, this could only affect Group FY23F revenue by 0.5%-1.0%, which we deem insignificant to warrant a forecast revision for now. Under the current low group PU, we expect Top Glove to relocate its production to other factories for shipments in May 2023 and beyond.

• At this juncture, the amount of write-offs for destroyed equipment and inventories is still being evaluated. On a positive note, the factory is insured and insurance assessors are scheduled to visit today to evaluate the issue.

• The stock currently trades at a high FY24F PE of 31.5x, which is 58% above its 10-year average of 20x.

Source: AmInvest Research - 31 Mar 2023