KEY INVESTMENT HIGHLIGHTS

• Upgrade to NEUTRAL with a revised target price of RM1.24 post the group's 1QFY25 results announcement
• 1QFY25 normalised loss narrowed further to near breakeven level of -RM4.9m from -RM23.9m in 4QFY24
• Quarterly financial performance for 2QFY25 and beyond should turn profitable, supported by improving business conditions
• Nonetheless, we anticipate the positive impact on the U.S tariff hike to be limited for Top Glove given its well-spread revenue base

Upgrade to Neutral. We are upgrading our recommendation for Top Glove to NEUTRAL from SELL previously and revising our target price of RM1.24. While 1QFY25 financial performance still came in at a loss, it has been narrowing considerably. With the continuous improvement in demand, we deduce that from 2QFY25 onwards, the group should be profit-making. Nonetheless, we opine that the pace of improvement is slower compared to its peers, which have already shown profitable quarters.

Moreover, given the group's well-spread revenue base, the positive spillover effect of US tariff hike on Chinese glove companies is less profound as compared to its peers. The elevated production cost remains a concern, although it will be partially addressed by the higher utilisation.

All these could potentially limit the pace of earnings recovery.

Close to breakeven. 1QFY25 reported profit of RM5.5m. After adjusting for exceptional items, the normalised loss came in at -RM4.9m. This was an improvement on qoq basis from a loss of -RM23.9m. The narrowing loss was mainly attributable to higher sales volume (+16%qoq) which led to better utilisation rate of 66% as well as higher ASP for nitrile gloves.

We view Top Glove's 1QFY25 financial performance to be in-line with our expectation. Though it is near breakeven level, we anticipate utilisation rate to improve further in the coming quarters. This will stem from continuous stock replenishment, higher order from the U.S as well as higher demand for Nitrile gloves. This will also translate to better profit margin.

Higher PBV multiple. No change to our earnings estimates at this juncture. However, premised on the improvement in fundamentals, we increase our PBV target to 1.5x from 1.05x which is one standard deviation above the two-year mean. We also take this opportunity to roll forward our valuation-based year to FY26. This led to an upward revision in target to RM1.24 from RM0.82 previously.

Source: MIDF Research - 23 Dec 2024