• FY24 results were below expectations, with full-year losses larger than both ours and consensus expectations

• 4QFY24 saw ASP increased by 5% QoQ to US$19–20/k pieces while utilisation rate rose to 60% (from 50–55%)

• Upgrade to HOLD rating with target price of RM1.03 (previously RM0.60)

Larger-than-expected FY24 losses – below expectations

FY24 revenue increased 12% YoY to RM2.5bn, predominantly driven by 17% higher in sales volume (FY24: c.26bn pcs vs. FY23: c.22bn pcs). EBITDA margin rose 14ppts YoY reflecting better operating efficiencies. Stripping out RM7m forex losses, RM96m land disposal gains, and RM17m reversal on inventories written down, Top Glove’s full-year FY24 core net loss came in at RM187m, narrowing from a loss of RM546m in FY23. FY24 results fell short of expectations, with losses exceeding our forecast of -RM147m and consensus of -RM140m, attributed to higher-than-anticipated operating costs.

Sales volume increased by 31% QoQ; expecting a better quarter ahead

Sequential revenue rose 31% QoQ to RM835m in 4QFY24, driven by higher sales volume (+31% QoQ; 9bn pieces) and ASP (+c.5%; US$19-20). The plant utilization rate improved to 60% in 4QFY24, compared to 50–55% in 3QFY24, based on active annual capacity of 60bn. EBITDA margin contracted 5ppts due to higher operating costs resulting from stronger RM, as c.45% of Top Glove’s costs are RM-denominated, coupled with higher maintenance costs with the preparation for the recommencement of idle production lines. Looking ahead, management guided for ASP to increase to US$20-21 in 1QFY25.

Upgrade to HOLD with target price of RM1.03

We cut our FY25–26E earnings by 8–11% to account for the impact of a stronger RM and introduced our FY27E earnings (+30%). Given the uneven recovery in earnings, we are also shifting our valuation methodology from P/E to P/B approach (at 1.4x, below its 3-year mean) on FY25 book value. We raise our TP to RM1.03 (from RM0.60). Despite the earnings cut, we are upgrading our rating to HOLD (from SELL), as we expect Top Glove to return to profitability in the upcoming quarters amidst the ongoing improved sales volume and ASP, benefiting from the US tariff hike on China glovemakers. Upside/downside risks: stronger/weaker sales momentum and ASP, rise in raw material costs, and China glovemakers ramping up capacity.

Proposed bonus warrants. Top Glove has proposed a bonus issue of warrants totalling up to 405m, on the basis of 1 warrant for every 20 ordinary shares. This represents c.5% of the company’s total enlarged shares. Assuming an indicative exercise price of RM1.09 and full exercise of the warrants, the company is expected to raise gross proceeds of c.RM440m to fund new factories, and refurbish existing factories, and for working capital use. The exercise is anticipated to be completed in 1QCY25.

Source: Philip Capital Research - 11 Oct 2024