• SELL, lower MYR0.57 TP from MY0.60, 27% downside. Top Glove started off FY23 with another consecutive loss-making quarter since 4QFY22 (Aug), no thanks to the ongoing demand-supply imbalance, which led to slow order replenishment by customers. While the ASP normalisation trend continues to taper off, we expect headwinds such as escalated gas tariffs and subdued industry utilisation rates to continue to weigh on TOPG’s profitability in the near term. Our TP incorporates a 0% ESG premium/discount.

• Results below expectations. 1QFY23 core loss widened to MYR134m from a core profit of MYR174m a year ago. Result came in significantly below our and consensus’ estimates, on the back of ongoing softness in ASPs, and lower sales volumes as the industry struggles to find equilibrium. Core loss has been adjusted for inventory write-down of MYR11.4m vs MYR56m in 4QFY22 as the group takes precautionary steps to examine its inventory level against the current challenging market environment. No dividend was declared for the quarter as management said its priority was to conserve as much cash as possible.

• ASPs still moderating. In 1QFY23, blended ASPs declined 8% QoQ to USD22/1000 pieces, with the QoQ decline trend continuing to moderate. Encouragingly, natural latex concentrate and nitrile latex prices continued to trend lower by 7% and 49% YoY, offset by a spike in gas tariffs. 1QFY23 utilisation rate tumbled to 30% from c.50% in 4QFY22 on customers’ lack of urgency to place orders, in light of excess production capacity within the glove industry. In view of this, the implementation of cost pass-through remains challenging at this juncture.

• Outlook. Latest nitrile and latex ASPs slipped further to USD17-19 and USD17-22 from USD22 and USD20-25 in 4QFY22. That said, current ASPs are on par with pre-pandemic levels, suggesting limited further risk of price erosion. Nevertheless, utilisation rate deteriorated further to 30-40% in November from 50% in September, due to the absence of customer demand as customers carry six months of inventory on hand.

• Earnings revision and valuation. We cut our FY23 and FY24 revenue estimates by 18% and 16% to factor in lower utilisation rates. Our FY23 and FY24 earnings estimates are cut to MYR43m-MYR168m from MYR348m- MYR428m in view of higher gas tariffs and a weaker topline. Despite a loss- making 1QFY23, we expect demand to gradually pick up by 2H23 after client inventory depletes – TOPG should at least achieve breakeven by FY23. Our DCF-derived TP incorporates a 0% ESG premium/discount, based its 3.0 score, which is in line with the country median.

• Key risks. Further deterioration in ASPs, deferment on capacity expansion plans, higher-than-expected raw material prices.

Source: RHB Research - 15 Dec 2022