Top Glove Corporation (Top Glove) reported a third consecutive quarterly net loss of RM164.7m in 2QFY23, a relatively flattish drop of -2% QoQ from a net loss of RM168.2m in the previous quarter. Sales volume improved QoQ as customers began to replenish stocks, though average selling price (ASP) remained low due to the intense price pressure from peers. The results are deemed below our and consensus expectations. Nonetheless, we raise FY23- 25 forecasts by 16%-29% to factor in higher sales volume and ASPs which we had been overly-bearish on previously. We remain cautious over escalating raw material and electricity costs due to inflationary pressures, and retain the Underperform call on Top Glove. TP is revised higher to RM0.62 (RM0.53 previously), based on 2-year average forward earnings, pegged to a 5-year average multiple PE of 28x.

• 2QFY23 results highlight. Top Glove’s revenue declined 2.3% QoQ to RM618.0m. Two principal regions reported lower revenue QoQ – Thailand (-37.8%) and China (-57.1%), mainly due to lower sales volume, while Malaysia’s revenue reported a slight increase of +3% QoQ. Pretax position remained at a loss of RM164.7m (-2.1% QoQ), while EBIT margin has also further eroded YoY from 7.8% to -23.1%. The oversupply situation continues to persist as customers still lack urgency in placing sizeable orders, with low utilisation rates of 30%–40% amongst the manufacturers leading to a notably shorter delivery time.

• Sales volume improved QoQ but ASPs remain under pressure. Sales volume increased QoQ in 2QFY23 for nitrile gloves (+13%), natural rubber (NR) gloves (+2%) and surgical gloves (+6%). Customers have started to see a need to begin replenishing stocks while excess stockpiles are depleting with glove products approaching their expiration dates. ASP saw overall drops however due to intense price competition among glove manufacturers – nitrile gloves (-1%), natural rubber gloves (-6%) and surgical gloves (-9%). The Group has temporarily ceased the production of vinyl gloves, which recorded a 9% drop in sales volume and 8% decline in ASPs in 2QFY23, due to overcapacity in the prevailing market.

• Lower raw material prices in 1HFY23 but expect to rise moving forward. The average natural latex concentrate prices have declined by 16% YoY to RM4.67/kg while nitrile prices have decreased by 25% YoY to USD0.86/kg. Moving forward, nitrile latex price is expected to rise by 8% from February 2023 to USD0.95/kg in March 2023, while latex is expected to stay flat amid wintering season until May 2023. Meanwhile, natural gas tariff is expected to decline 15% effective from April 2023, though costs will remain high due to the increase in electricity tariff by 42% effective from Jan 2023.

• Challenging near term outlook. The Group remains under pressure given the persistent demand-supply imbalance. While the glove manufacturers have started to raise ASPs from February 2023, we believe that the ability to pass on cost to customers might still be limited. However, gloves remain an essential item in the medical sector and we believe that its long-term growth prospect is still encouraging given the importance of hygiene, with growing demand from developing markets.

Source: PublicInvest Research - 17 Mar 2023