Results

• Top Glove registered revenue of RM618.0m and net loss of RM164.7m in 2QFY23. Revenue dropped 2.3% QoQ from RM632.5m in 1QFY23 and plunged 57.4% YoY from RM1.4b in 2QFY22. Meanwhile, bottomline improved 2.1% QoQ (1QFY23: - RM168.2m) and declined YoY from a net profit of RM87.5m in 2QFY22.  Lower than expected, missed expectations. 6MFY23 revenue at RM1.25b was below expectation after achieving 22% and 33% of our revenue forecast and consensus of RM5.6b and RM3.8b respectively. Meanwhile, reported 6MFY23 net loss of RM332.9m was also below our full year forecast and consensus full year estimates of net profit RM201.9m and net loss RM212.3m respectively. The lower-than-expected results in 2QFY23 were due to an excess of customers’ inventory and a declining ASP by 4% QoQ.

• Lower raw material but higher tariff rates. Despite lower raw material prices in the recent quarter, it was offset by the higher natural gas tariff (+17% QoQ, +64% YoY) coupled with a higher electricity tariff.

• Flat performance QoQ. A marginal drop in revenue by 2% and a slight improvement by 2% in net profit were attributable to higher sales volume which grew by 6% from the previous quarter. This was also underpinned by a small drop in raw material prices by 1% and 6% for latex price and NBR latex price, respectively.

• No dividend was declared. No dividend was proposed by the Group for the current quarter of 2QFY23, which we forecast there will be no dividend in FY23F.

Comments

• Higher ASP. Going forward, to cushion the headwinds encounter, Top Glove started to uplift its ASP (Average Selling Price) by ± 15% in February 2023 as cost pressure began to mount by activating the cost pass-through mechanism. Similarly, since sales volume started to pick up, Top Glove begin to increase its utilisation rate and is expected to ease its margin pressure as the Management foresees lower natural gas tariff in 2QCY23.

• Depleting inventory. The Management is optimistic that the customers’ inventory has declined as compared to the previous quarter and will continue to be lower as their glove products are approaching its expiry date, hence giving the Group a slight space to revise its ASP as they believe that the imbalance of demand and  supply is coming to an end.

• The Management has put on hold its expansion plan in a view of higher operating costs and is currently focusing on improving in working capital management to ensure better cash flow efficiency coupled with preserving more cash.

Earnings Outlook / Revision

• We revise our FY23F and FY24F bottom-line to a net loss of RM120.2m (previously +RM201.9) and a net profit of RM150.4m (previously +RM282.8m) respectively. We downgrade to a net loss in FY23F due to the unexpected aggressive hike in operating costs and inflationary pressure, which we did not anticipate in the previous quarter. As such, we also downgrade our FY24F net earnings.

Valuation / Recommendation

• Upgraded to HOLD with a target price of RM0.90 which gives an 8% upside from the current market price of RM0.835, at the time of writing.

• Our target price of RM0.90 is now pegged at 48x its FY24F EPS of 1.9 sen, which is lower than its 3Y +1.5 standard deviation of 53.5x PE but higher than the 3Y +1 standard deviation of 42.2x PE.

• We believe that the ascribed PE multiple is justifiable by the ability of the Group to increase its ASP, higher sales volume, improvement in utilisation rate, and long-term demand and supply outlook for the glove industry coupled with declining customers’ inventory level.

Source: JF Apex Securities Research - 17 Mar 2023