Top Glove’s 3QFY22 core LATAMI of -RM8.6m (2QFY22: RM91.5m, 3QFY21: RM2.02bn) brought 9MFY22 core PATAMI to RM255.8m (-97% YoY). The results came in below both our and consensus estimates, at 50% and 49% respectively. The negative deviation to our forecast was mainly due to lower-than-expected revenue. We lower our projections for FY22-24f by 18-47%, as we cut our utilisation rates forecast for FY22f/23f/24f to 60%/78%/81%, to better reflect the tough operating environment. Consequently, our TP is lowered to RM0.82 (from RM1.12), representing a PE multiple of 17.3x (at mean to its 5-year pre-pandemic average) on its FY23f EPS of 4.8 sen. Reiterate SELL on Top Glove.

Below expectations. Top Glove’s 3QFY22 core LATAMI of -RM8.6m (2QFY22: RM91.5m, 3QFY21: RM2.02bn) brought 9MFY22 core PATAMI to RM255.8m (-97% YoY). The results came in below both our and consensus estimates, at 50% and 49% respectively. The negative deviation to our forecast was mainly due to lower-than expected revenue. Core LATAMI was arrived at after stripping out EIs (mainly forex gains) amounting to RM23.9m.

Dividend. None declared (3Q21 DPS: 18.0 sen). 9MFY22 DPS: 1.2 sen (9MFY21: 59.7 sen).

QoQ. Despite the decline in ASP (-5%), revenue still registered a slight growth of 1.1% as the sales volume saw a 6% improvement; better sales volume was achieved on the back of continuous recovery in the shipments to the US (+8%), after the lifting of the US CBP ban in Sept 2021. Note that latex raw material prices jumped 17% QoQ due to wintering season, while nitrile raw material prices have continued to trend downwards (-3%) due to the oversupply situation. Inability to fully pass on cost increases and the low utilisation rate (c.50-60%) during the quarter have resulted in gross margins slipping into the negative territory of -0.2%. Consequently, Top Glove reported a core net loss of -RM8.6m (vs 2QFY22: RM91.5m).

YoY. Revenue fell by 65% YoY, as both ASP (-64%) and sales volume (-19%) suffered a decline as demand tapered off. This coupled with higher operating costs, have continued to compress margins (EBITDA margin -57ppts QoQ). Top Glove’s performance for the quarter slipped into the red, reporting a core LATAMI of -RM8.6m (vs 3QFY22: RM2.016bn), due to the same reasons mentioned above.

YTD. Revenue was 69% lower as a result of both lower ASP (-61%) and lower sales volume (-25%). The higher production costs (higher wages, natural gas and electricity costs) have led to margin compression as the cost increases were unable to be fully passed on to buyers given the tough competition in the market currently. With that, core PATAMI slumped by 97% from last year’s supernormal profit base.

Outlook. We think that the headwinds faced (higher operating costs and utilisation rates below pre-pandemic levels) by gloves players currently will persists for a bit longer, given that the demand-supply imbalance has yet to normalise. That said, we think that utilisation rate may still see small improvements on a QoQ basis, as the sales volume to US continue to recover. Also, the end of wintering season and lower demand from glove manufacturers should lead to softer latex and nitrile butadiene raw material prices going forward. Besides, we note that some of the smaller glove players in the market are looking to exit the industry completely due to the intense competition and tough operating environment. While this would help ease the oversupply situation slightly, we reckon that concerted effort from all major glove makers are still required to normalise the demand-supply mismatch. Top Glove has also indicated that it is not in a hurry to acquire more glove plants, as it still has idle capacity to be filled currently.

Forecast. We cut our core PATAMI projections for FY22-24f by 18-47%, as we lower our utilisation rates forecasts for FY22f/23f/24f to 60%/78%/81% to reflect the tough operating environment.

Maintain SELL, TP: RM0.82. Following our earnings revision, our TP on Top Glove is subsequently lowered to RM0.82 (from RM1.12), representing a PE multiple of 17.3x (at mean to its 5-year pre-pandemic average) on its FY23f EPS of 4.8 sen. Reiterate SELL on Top Glove.

Source: Hong Leong Investment Bank Research - 10 Jun 2022