TOPGLOV's 1QFY25 met expectations. It returned to the black with a core profit of RM4.6m as it shook off high-cost inventory, despite higher ASPs impact to take effect only from 2Q25. 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 in subsequent quarters. We raise our TP from RM1.02 to RM1.30 based on 2.2x FY26F BVPS reflective of valuations commensurate with expected steady earnings upcycle (previously 1.7x). Maintain forecasts and MARKET PERFORM call.

TOPGLOV's 1QFY25 met expectations. It registered a small core net profit of RM4.6m or 3% of ours and consensus full-year net profit forecasts. We keep our FY25F and FY26F earnings unchanged in anticipation of stronger earnings in the remaining quarters of FY25 underpinned by pent-up demand.

QoQ, 1QFY25 revenue rose 6% due to a higher sales volume (+16%) which more than offset lower ASP (-2%). However, EBITDA surged >100%, thanks to: (i) an absence of high-cost inventory (which weighed on its performance then), and (ii) higher revenue leading to better-than-expected economies of scale. As a result, it returned to the black with a core profit of RM4.6m (excluding RM0.9m gain from PPE) in 1QFY25 compared to a loss of RM43m in 4QFY24. YoY, its 1QFY25 revenue rose 80% largely due to a higher sales volume (+103%) which more than offset lower ASP (-2%). At the net level, its 1QFY25 posted a core net profit of RM4.6m compared to a loss of RM58m in 1QFY24 due to the absence of high-cost inventory (which weighed on its performance then). No dividend was declared this quarter as expected.

The key takeaways from the analysts briefing last Friday are as follows:

1. 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 highlighted that its exports to the US are continuing to show improvement which rose 21% QoQ in 1QFY25. US sales accounted for 18% of total group volume sales, above the 15% mix for FY24, but still below the pre-pandemic average of 20%−30%.
2. 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 Dec CY24 and expects orders form the US to pick up in subsequent quarters, underpinned by inventory rebuilding by distributors and boosted by the US recent tariff imposition on Chinese gloves. Presently, its sales volume had strengthened 10−20% MoM, bringing utilisation rate to 66% compared to 60% in 4QFY24 and 45% in 3QFY24.
3. It is optimistic that ASPs are expected to inch up gradually by 3−5% from Nov CY24 onwards, potentially by USD1.00 per 1,000 pieces due to the uptick in demand and mitigation against the appreciating MYR against USD. However, due to the lag effect, ASP increases will only be felt gradually starting from Dec CY24. The company noted that the positive effects of a rising ASP will only be felt after Feb CY25 due to the frontloading effects of US customers purchasing from Chinese glovemakers. We conservatively assume ASP of USD20/1,000 pieces in our earnings model.
4. In anticipation of the strong demand, it is expecting to restart factories which were initially shut down, and raising installed running capacity from 65b to 70b pieces by end-FY25, which is 65% our implied utilisation.

Valuations. We keep our FY25F and FY26F earnings unchanged in anticipation of strong demand moving into FY25. In tandem with the improved outlook, we raise our TP from RM1.02 to RM1.30 based on 2.2x FY26F BVPS (previously 1.7x), which is at the sector's early upcycle phase of between 2x and 4x, i.e. the levels seen emerging from an upcycle in 2012 but at a lower end of band that we believe is valid due to the emergence of Chinese glove makers; we have earlier recalibrated our valuations in other glove names we cover that have recently reported results. For illustration purposes, if we assume an ASP of USD21 in our earnings model, the stock PER would trade at 46x or +2.0SD above its pre-Covid 5- year historical 1-year forward average. Additionally, in terms of PBV, the stock is trading below -1.0SD pre-COVID 5-year historical average 1-year forward of 3.0x.

^Gain from divestment of land and property, plant and equipment

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) has 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 Sep) making Malaysian glove makers the prime beneficiary. 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 after the implementation of the initial 15% tariff on Chinese glove imports, this figure was lowered to 7.5% during phase one of the US-China trade agreement back in 2019, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 23 Dec 2024