• Keep BUY with new DCF-derived TP of MYR1.28 from MYR1.26, 25% upside. Top Glove Corp’s core loss narrowed QoQ to MYR42.6m in 4QFY24 (Aug), bringing its FY24 core loss to MYR229m – below our and Street expectations. Despite the weaker-than-expected results, we take cognisant of the notable improvement in operating dynamics and management’s ongoing commitment to streamline operating efficiency that have enabled the group to be in a better position for a turnaround. Our TP implies a 1.8x FY25F P/BV, or +1.4SD from its 2-year historical mean.

• Results overview. FY24 numbers came in below our expectation largely due to the prolonged suboptimal plant utilisation in the beginning of FY24 and the weakening of USD/MYR. Realised ASP was only up by 3% QoQ to USD19.7 bringing its full year FY24 ASP to USD19.3 (-11% YoY). Sales volume spiked by 32% QoQ (+91% YoY) to 8.8bn pieces mainly driven by strong growth in the US where sales volume soared 117% QoQ in 4QFY24. Raw material prices were mixed, with natural latex at -1% QoQ, offset by the 8% QoQ increase in nitrile butadiene rubber (NBR) prices. Plant utilisation rate improved further to 59% (vs 49% in 3QFY24) which resulted in TOPG’s core loss narrowing.

• Key takeaways from briefings. Management has undertaken proactive measures to streamline its operating efficiency that includes improving the heat recovery systems and burner optimisation for efficient gas usage. This has yielded positive results, leading to a 6.5% QoQ decline in cost per carton. Meanwhile, management expects the effect of a higher ASP to take place from November as it will begin passing on the effect of the weakening USD to customers. TOPG also plans to add another 4bn new capacity next year, bringing its effective capacity to 64bn (from 60bn) by 2025.

• Outlook. We expect sales volume growth momentum to sustain into 2025 (we estimate +39% YoY) on the back of a pick-up in inventory replenish activities (as the industry oversupply overhang has eased) and potential trade diversion arising from the US tariff on China. Meanwhile, natural latex prices are expected to increase c.10% QoQ in the coming quarter, offset by the c.7% decline in NBR prices. We expect the favourable industry operating dynamics to sustain moving forward, underpinned by healthy demand recovery, easing price competition risks as well as customers being more receptive to the ASP increase. That said, the impact of the strengthening MYR should be sheltered by the ASP increase as Malaysian gloves makers are in the discussion stage to raise prices to translate the effect of the weakening USD to customers.

• Earnings revision and valuation. Post results, our FY25F-26F earnings remain largely unchanged. We roll forward our base year to FY25F and incorporate FY34F as our terminal year into our DCF valuation. Post adjustment, our DCF- derived TP is now at MYR1.28 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 - 11 Oct 2024