TOPGLOV's FY24 missed expectations as 4QFY24 was impacted by MYR appreciation. Its FY24 losses nevertheless narrowed as it shook off high-cost inventory coupled with savings from the decommissioning of inefficient plants. It guided for an uptick in orders on restocking by customers and expects to benefit from the recently announced US tariffs on Chinese glove makers. It has proposed a bonus issue of one warrant for every twenty TOPGLOV shares or up to 406m of free warrants. We maintain our forecasts, TP of RM1.02 and MARKET PERFORM call.

TOPGLOV's FY24 missed expectations. It registered a core net loss of RM156m compared to our full-year net loss forecast of RM127m and the full-year consensus net loss estimate of RM137m. The variance from our forecast was due to lower-than-expected margins arising from an unexpected surge in MYR appreciation against the USD and costs incurred in restarting some plants in anticipation of higher demand.

However, we keep our FY25F and FY26F earnings unchanged in anticipation of strong demand moving into FY25, which should mitigate the further strengthening of the MYR in 1QCY25.

QoQ, its 4QFY24 revenue rose 31% due to a higher sales volume (+31%) and ASP (+2%). However, Its EBITDA fell 57%, no thanks to: (i) lower-than-expected margins arising from an unexpected surge in MYR appreciation against the USD, and (ii) costs incurred in restarting some plants in anticipation of higher demand. As a result, its 4QFY24 core net loss (excluding RM39m gain from land sale) widened to RM43m compared to a loss of RM4m in 3QFY24. YoY, its FY24 revenue rose 12% largely due to a higher sales volume (+20%) which more than offset lower ASP (-11%). At the net level, its FY24 core losses narrowed to RM156m compared to RM925m in FY23 due to depleting high-cost inventory. No dividend was declared this quarter as expected.

The key takeaways from the analysts briefing yesterday are as follows:

1. The Group is optimistic that the strong growth momentum will sustain, as customers continue replenishing their depleting glove stockpiles. The group continues to see MoM uptrend in sales volume in Sept 2024 and expects customers' replenishment activity to pick up in subsequent quarters, underpinned by inventory rebuilding by distributors, indicating that demand recovery had further gained momentum. Presently, its sales volume had strengthened 25%-30% MoM, bringing utilisation rate to 65%-70% vs. our assumption of 67% in FY25 (based on 60b pieces capacity) compared to 60% in 4QFY24 and 45% in 3QFY24.
2. It is optimistic that ASPs are expected to inch up gradually, potentially by USD1.00 - USD2.00 per 1,000 pieces due to the uptick in demand and mitigation against the appreciating MYR against USD. However, due to the lag impact, ASP increases will only be felt gradually starting from Nov-Dec CY24. We believe predatory pricing by certain overseas players (i.e. selling below cost over an extended period to eliminate competition) have diminished as Chinese players' utilization hit >90%. We conservatively assumed ASP of USD20/1,000 pieces in our earnings model.
3. TOPGLOV expects to benefit from the recently announced US tariffs on Chinese glove makers. It has seen more enquiries from its US customers. The group highlight that its exports to the US is continuing to show improvement which rose >100% from a low base in 4QFY24 and jumped 29% YoY in FY24. As an indication, TOPGLOV sales in the US accounts for 15% in FY24 compared to pre-pandemic average of 20%-30%.
4. Separately, TOPGLOV has proposed a bonus issue of one warrant for every twenty TOPGLOV shares or up to 406m of free warrants.

Valuations. We keep our FY25F and FY26F earnings unchanged in anticipation of strong demand moving into FY25. Our TP of RM1.02 is based on unchanged 1.7x FY26F BVPS, which is at a discount to sector's recovery cycle of between 1.8x to 2.5x, i.e. the levels seen emerging from an oversupply downturn in 2008, and a discount that we believe is valid due to the emergence of Chinese glove makers. We roll forward our valuation base from FY25F to FY26F due to the improved outlook. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 3).

Reiterate MARKET PERFORM.

Outlook. Amplifying the bright prospects are: (i) indications pointing towards a strong demand recovery moving into 2HCY24 and CY25, underpinned by inventory rebuilding from distributors and faster-than-expected industry consolidation,( ii) tell-tale signs that predatory pricing by certain overseas players (i.e. selling below cost over an extended period to eliminate competitors) have diminished as Chinese players' utilization hit >90%, and (iii) US imposition of tariff ratchets up to 50% and 100% in CY25 and CY26, respectively, (revised up as announced on 13 Sept) making Malaysian glove makers the prime beneficiary. We expect glove stock prices to re-rate in anticipation of near-term earnings upsurge which clearly is a positive for the sector. We now expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants and exit of new entrants.

Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is no more net new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Key risks to our recommendation include: (i) certain Chinese glove giants end predatory pricing practices (i.e. selling below cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii) stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii) further changes in tariffs which have happened before; recall that post the implementation of the initial 15% tariff on Chinese glove imports, this figure was lowered to 7.5% during phase first US-China trade agreement back in 2019, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 11 Oct 2024