• Downgrade to SELL from Buy, with DCF-derived TP of MYR1.10 from MYR1.28, 17% downside. Top Glove Corp's 1QFY25 (Aug) core loss of MYR21.9m were below our and Street expectations due to the mismatch between cost and ASP. As its share price has done decently well (after hitting our previous TP), we downgrade the stock on the back of potential slowdown in sales volume (due to US customers' frontloading orders). Our TP includes a 2% ESG premium as TOPG's ESG score of 3.1 is above the country median.
• Results overview. 1QFY25 core loss of MYR21.9m was wider than our expected core loss of MYR5m largely due to timing mismatch between cost and ASP. Realized ASP fell 2% QoQ to USD19.3 whereas sales volume spiked by 16% QoQ (+104% YoY) to 10.4bn pieces mainly driven by strong growth in the US. Raw material prices were mixed, with natural latex at +4% QoQ offset by a 3% QoQ decline in nitrile butadiene rubber (NBR) prices. Plant utilisation rate improved 7ppts QoQ to 66% which resulted in the core loss narrowing.
• Key takeaways from results briefings. TOPG undertook a price adjustment towards the latter part of 1QFY25 as it will begin passing on the effect of the weakening USD to customers. The effect of ASP increase (USD1-2), particularly in the US market, will be more pronounced in 2QFY25 due to the time lag effect. The pricing structure of the 5-year senior sukuk wakalah will be concluded by Jan 2025. Correspondingly, the group will utilise MYR800m (out of MYR3bn of the sukuk) together with MYR380m internal cash to fund the redemption of the perpetual sukuk (which is set to expire by Feb 2025).
• Outlook. We are of the view that the global trade reshuffling has already taken place, with the latest shipment from China to the US expected to conclude by mid-Nov 2024 (given the required shipping period before the US import tariff kicks in). While we maintain our overall demand growth assumptions in 2025 (+10%), we expect sales volume to taper off in 1QCY25 as we believe there was evidence of potential frontloading orders from US customers in 4QCY24 (Figure 3). We think Malaysia will not be able to reap the full advantage of the import tariff imposed on China's manufacturers as efforts to raise prices beyond USD24 remain challenging given the pushback from US customers. Meanwhile, future price adjustment merely reflected the effect of the weakening USD that incurred in the previous quarter rather than taking advantage from higher tariff. This in turn may lead to ASP-cost spread disparity persisting (currently vs pre-COVID) which may prolong the sector's earnings recovery.
• Post results, we lower our FY25F-27F earnings to MYR-13m, MYR35m, and MYR199m from MYR-5m, MYR44m and MYR264m after we incorporate higher raw material prices and housekeeping for other operating metrics. Our downgrade is premised on TOPG's valuation running ahead of earnings (current P/BV trading at +3.5SD above its 2-year mean) and potential slowdown in sales volume in 2QFY25. Key risks: Increase in gloves ASP, faster-than-expected demand recovery, higher-than-expected utilisation rate, and lower-than-expected raw material prices.

Source: RHB Research - 23 Dec 2024