TOPGLOV’s 9MFY24 results met expectations. Its 9MFY24 losses narrowed as it shook off high-cost inventory coupled with savings from the decommissioning of inefficient plants. It guided for an uptick in orders on restocking by customers. Nonetheless, massive overcapacity will continue to weigh on the sector. We maintain our forecasts, TP of RM0.75 and UNDERPERFORM call.

TOPGLOV’s 9MFY24 results met expectations. It registered a net loss of RM116m compared to our full-year net loss forecast of RM127m and the full-year consensus net loss estimate of RM144m. We consider the results within our expectation as we expect sustained losses, albeit a smaller one, in 4QFY24 on elevated raw material and natural gas costs coupled with poor economies of scale on a less-than-optimum production volume.

QoQ, its 3QFY24 revenue rose 16% due to a higher sales volume (+13%) and higher ASP (+3%). Its EBITDA improved to RM73m compared to RM28m in 2QFY24 thanks to: (i) depleting high-cost inventory, and (ii) savings from the decommissioning of certain inefficient production capacity. As a result, its 3QFY24 core net loss (excluding RM54m gain from land sale) narrowed to RM4m compared to a loss of RM51m in 2QFY24. YoY, its 9MFY24 revenue fell 6% largely due to a lower ASP (-8%) which offset higher volume sales (+0.5%). At the net level, its 9MFY24 core losses narrowed to RM116m compared to RM463m in 9MFY23 due to depleting high-cost inventory. No dividend was declared this quarter as expected.

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

1. TOPGLOV highlighted that the shipment delays in 3QFY24 were estimated at 500m pieces with the bulk of them already shipped and will be booked in 4QFY24.

2. The Group is optimistic that the strong growth momentum will sustain, as customers continue replenishing their depleting glove stockpiles. The group continues to see MoM uptrend in sales volume in June 2024 and expect customers’ replenishment activity to pick up in subsequent quarters, underpinned by inventory rebuilding from distributors, indicating early signs of potential recovery in demand. It has seen sales order rising 25%-30% MoM.

However, we expect volatile quarterly sales order as distributors or buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.

3. Due to the high operating cost and sustained poor economies of scale from less than optimum sales volume despite seeing incremental orders, the group only expect mid-teens EBITDA margin of 15%-17% in year 2026 compared to 9MFY24 of 8%.

4. Moving into 3QCY24, we expect input latex price to ease or taper off as the wintering months (low production during the wintering months between Dec till May) comes to an end. However, nitrile butadiene rubber price is expected to continue to remain stubbornly high (YTD CY24: +10%). The group expects to increase ASP but unable to fully pass cost through due to the sustained high input cost but stop short of revealing the quantum increase. Moreover, due to the current competitive pressure emanating from massive oversupply and low industry utilisation averaging 40%, customers have ample switching alternatives should their incumbent suppliers attempt to raise prices.

Outlook. The group expect the current challenging operating environment to persist and only expect a likelihood of a meaningful recovery to take place only sometime in 2025. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 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. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24.

Forecasts. Maintained.

Valuations. We maintain our TP of RM0.75 based on 1.3x FY24F BVPS, at a 40% discount to the sector’s average of 1.7x seen during the last downturns in 2008-2011 and 2014-2015 as we believe the current downturn could go down in history as 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 include: (i) certain Chinese glove giants end predatory pricing practices (i.e. selling below cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii) stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii) industry consolidation reducing competition among players, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 20 Jun 2024