• Maintain BUY, with new DCF-derived TP of MYR1.26 from MYR1.28, 25% upside. Top Glove Corp is scheduled to report its 4QFY24F (Aug) results on 10 Oct. We expect its core loss to narrow QoQ to MYR2-5m (vs 3QFY24 core loss: MYR53.5m), on a recovery in sales volume, offset against by QoQ flattish ASP and a weaker USD/MYR. Our BUY call is premised on improving investor sentiment (due to favourable operating dynamics) – we think TOPG (being a high-beta) is poised for a meaningful share price recovery.

• Results preview. We expect TOPG to deliver a core loss of MYR2-5m from a core loss of MYR53.5m in 3QFY24 on the back of: i) Improving operating efficiency (expecting a higher plant utilisation rate) with sales volume expected to grow by 20%; ii) flattish ASP, offset against by a weaker USD/MYR (-3% during the quarter). In terms of cost, global natural gas commodity prices spiked 19% QoQ, offset against by the easing of raw material prices (ie natural latex: -2%; acrylonitrile: -5%).

• Outlook. Industry operating dynamics remain in favour of local gloves manufacturers as customers are more receptive to the price hike. That said, industry blended ASP is set to improve further to USD21-22/1,000 pieces (pcs) by 4QCY24 as MY glove makers are in the discussion stage to raise prices to translate the effect of the weakening USD to customers. China glove makers’ ASPs now at USD18-19 per 1,000 pcs from USD17-18 in the previous quarter. In terms of demand, Malaysia’s gloves export volume surged 66% MoM and 105% YoY in Aug, outpacing the growth in July (+12% MoM; +43% YoY). The latest export volume is even 34% higher compare to pre-pandemic 2-years monthly average number indicating that the recovery momentum of global gloves demand remains healthy.

• Earnings revision and valuation. We lower our FY25F-26F earnings to -MYR5m and MYR44m (from -MYR6m and MYR52m) attributed to the weakening USD against the MYR. Our USD/MYR assumptions for FY25-26 were lowered to 4.01 and 4.00 from 4.65 and 4.60. While the impact of the weaker USD may erode TOPG’s margin in the near term, we believe the impact could be mitigated by the company raising ASP to offset against the weakening USD, which in turn should sustain our base case long-term margin outlook. As such, we raise our FY25F-26F ASP by 5% and 5%. Post earnings adjustment, we derived new TP of MYR1.26, representing 1.8x FY25F P/BV, or +1.3SD from its 2-year historical mean. We believe its valuation remains compelling, trading at -0.2SD from its 2-year historical mean of 1.5x. Our TP also incorporates a 2% ESG premium as TOPG’s ESG score is 3.1. 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 - 7 Oct 2024