• Upgrade to HOLD (TP: RM1.14). Top Glove posted a core LATAMI of RM181mn during FY24 compared to RM539.1mn a year ago. The result was significantly below both our in-house and consensus full-year forecasts. The lower-thanexpected earnings were due to reduced sales volume and higher operating costs. We are cautious about China's potential shift to non-U.S. markets which may increase competition for Malaysian glove makers. Concern heightened, with no major catalysts for demand growth and ongoing oversupply. Therefore, we maintain a cautious stance on the rubber glove sector in the near term. Upgrade to a HOLD call from SELL for Top Glove with a higher TP of RM1.14 (previously RM0.85) as we roll over our valuation to FY26. Our valuation is based on a FY26F BV/share of RM0.57 and an average of 3-year historical low P/BV of 2x.

• Key Highlight. FY24 revenue improved by 11.5% QoQ while the LBT narrowed to RM33.2mn from RM898mn in FY23, thanks to a strong recovery in sales volume which grew by 19% YoY as well as lower production costs which were supported by increased utilization rate. The group shared that the current utilization rate stands at 60%. Management remains optimistic about increasing 8-10 production lines per month to meet demand though this will depend on the prevailing market conditions. In addition, the recent improvement in sales orders was primarily due to stock replenishment while the impact of the U.S. tariff hike on China is expected to be felt in 2Q25. On a separate note, Top Glove proposed a bonus issue of 1 warrant for every 20 existing ordinary shares. Note that this exercise does not increase the total share base.

• Forecast. We cut FY25F/ FY26F earnings assumption by 8.4%/22.9% to RM54mn/ RM80mn respectively, to account for lower sales volume and compressed margin.

• Outlook. We have a positive outlook on the recent U.S. tariff hike on China which could offer a competitive edge to Malaysian players. However, we remain cautious about China's potential to diversify its market by targeting non-U.S. customers which may replicate competitive pressures for Malaysian glove manufacturers in other regions. Additionally, we believe that the rubber glove industry is currently lacking significant catalysts to drive demand growth in the near term, as oversupply and fluctuating market conditions persist. As such, we adopt a cautious stance on the sector's short- to medium-term outlook.

Source: BIMB Securities Research - 11 Oct 2024