• Keep BUY, new MYR1.28 TP (DCF) from MYR1.32. 3QFY24 (Aug) core loss widened QoQ to MYR53.5m, bringing 9MFY24 core losses to MYR186m, below our and Street’s expectations. Despite weaker-than-expected results, we note the recent improvement in operating dynamics and management’s commitment to the turnaround story, which bodes well for Top Glove. Our TP implies 1.8x FY24F P/BV vs the 1.9x industry average. We incorporate a 2% ESG premium, as TOPG’s 3.1 ESG score is above the 3.0 country median.

• Results overview. 3QFY24’s core loss narrowed YoY and QoQ to MYR53.5m, bringing 9MFY24 numbers below our forecast. The weaker- than-expected performance was on a slower cost pass-through pace, as realised ASPs only rose 3% QoQ to USD19.10 (9MFY24 average: USD18.80, our estimate: USD20) vs a 20% and 16% spike in natural and synthetic latex prices. Sales volume grew 13% QoQ (+32% YoY), offset against higher raw material prices and fuel costs (natural gas tariff: +6%). The plant utilisation rate did improve further to 45% (2QFY24: 40%), which led to a narrow LBIT of MYR34m (previous quarter: -MYR59m). The impact from port congestion was limited, resulting in 5% of revenue being deferred this quarter.

• Operating metrics. We attributed the slower-than-expected ASP hike to an unfavourable product mix during the quarter (as volumes sold for nitrile products exceeded the sales of latex ones (note: The latter commands higher ASPs). Having said that, the blended ASP for latex gloves have seen a 7% QoQ increase, which we think is a positive sign in sustaining the ASP growth momentum ahead (latex products make up 35-40% of total volumes sold).

• Outlook. Moving forward, order volumes are set to pick up further (management guided for 20-25% QoQ growth in 4QFY24) on top of the 3bn added capacity, which should start running this month. TOPG also believes natural latex prices are set to stabilise in the coming quarter, whereas the natural gas tariff could potentially be reduced by 3% in the next tariff review period in July. With industry operating dynamics turning favourable, we expect a stronger 2H24 performance from glove makers like TOPG, underpinned by demand recovery, the gradually subsiding price competition from Chinese makers, and customers being more receptive to ASP increases.

• Earnings revision and valuation. Post results, we cut our FY24F-25F earnings to -MYR175m and -MYR6m from –MYR152m and MYR2m, taking into consideration the slower-than-expected ASP hike, offset against newly added capacity to cater for rising customer orders. Post the earnings cut, our DCF-derived TP is now lowered to MYR1.28. Key risks: A decrease in gloves ASPs, slower-than-expected demand recovery, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 20 Jun 2024