• Upgrade to BUY from Neutral, with new DCF-derived MYR1.32 TP from MYR0.83. Top Glove Corp is scheduled to report its 3QFY24 (Aug) results on 19 Jun. We expect core loss to narrow QoQ to MYR40-45m (vs a core loss of MYR66m in 2QFY24), on the back of a recovery in sales volume and ASP. Our BUY call is premised on improving investor sentiment (from favourable operating dynamics) – we think TOPG (being a high-beta) is poised for a meaningful share price recovery in 2024.

• Results preview. We expect TOPG to deliver a core loss of MYR40-45m from a core loss of MYR66m in 2QFY24 on the back of: i) Improving operating efficiency (expecting a higher plant utilisation rate); ii) recovery in ASP. These catalysts should be offset by the recent 5-6% uptick in natural gas tariff and escalation of raw material prices (ie natural latex: +12%; acrylonitrile: +3.6%).

• Industry dynamics turning favourable. We learnt that the industry operating dynamics has turned favourable for glove manufacturers as we understand that customers are more receptive to the ASP increase in the coming months. On the other hand, we understand that Chinese glove makers have also raised their ASP to USD17-18 from USD15-16 according to our channel checks. In terms of demand, Malaysia’s glove exports volume surged 46% YoY (its highest ever YoY growth post-pandemic) and 3.6% MoM, while exports value was at a 39% YoY growth (-3.8% MoM). This comes after Malaysia recorded exports volume growth of 6% QoQ during 1Q24, indicating that the recovery momentum of global glove demand remains healthy.

• Earnings revision and valuation. We cut our FY24F-25F earnings to –MYR152m and MYR2m from –MYR128m and MYR4m as our previous ASP assumptions were slightly ahead of the actual ASP, offset by the higher production volume and stronger USD/MYR. We also lower our required return assumption to 9% from 13% after trimming our beta to 1.3 from 1.6 to factor in improving operating dynamics in the gloves industry. Our TP implies 1.9x FY24F P/BV vs the 1.9x industry average and incorporates a 2% ESG premium as TOPG’s ESG score of 3.1 is above the country median.

• Key risks. Decrease in gloves ASP, slower-than-expected demand recovery, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 18 Jun 2024