• Downgraded to SELL (TP: RM1.14). Top Glove posted a core LATAMI of RM17.8mn during 1QFY25 compared to core LATAMI of RM54.2mn a year ago. We deem the result was below both our in-house and consensus full-year forecasts. The lower-than-expected earnings were due to higher tax expenses. Top Glove is expected to deliver strong 2QFY25 results due to higher orders ahead of the January 2025 US tariff but may face slower orders and softer earnings from 3QFY25 as customers deplete their stockpiles. Concern heightened, with no major catalysts for demand growth and ongoing oversupply. Therefore, we maintain a cautious stance on the rubber glove sector in the near term. With Top Glove's share price rallying, we shift our rating to a SELL from HOLD but maintain our TP at RM1.14. Our valuation is based on a FY26F BV/share of RM0.57 and an average of 3-year historical low P/BV of 2x.

• Key Highlight. 1QFY25 utilization rate stood at 66% and has further improved to 70% as of November 2024. This was driven by increased sales orders from US customers ahead of the 50% tariff on glove imports from China which takes effect in January 2025. Additionally, sales volume to US customers currently accounts for 18%, (+21% QoQ). The group believes there is still room for growth to achieve the pre-COVID sales volume of 24% from US customers. Besides, the management highlights that current ASP to US customers is about USD20-21/1k pieces while USD1/1k pieces gap to non-US customers.

• Forecast. We cut FY25F/ FY26F earnings assumption by 64%/27% to RM19.5mn/ RM58.1mn respectively, to account for lower ASPs and margin assumption. Also, we introduced FY27F earnings assumption of RM89mn which translates into a 2.2% net profit margin.

• Outlook. We anticipate Top Glove to achieve commendable results in 2QFY25, driven by higher orders in November and December as customers placed orders ahead of the new US tariff implementation in January 2025. However, we expect orders to slow from January onwards as customers are well-stocked, potentially dampening earnings from 3QFY25 onwards. Besides, we remain cautious about China's potential to diversify its market by targeting non-US customers which may replicate competitive pressures for Malaysian glove manufacturers in other regions. Additionally, we believe that the rubber glove industry is currently lacking significant catalysts to drive demand growth in the near term, as oversupply and fluctuating market conditions persist. As such, we adopt a cautious stance on the sector's short- to medium-term outlook.

Source: BIMB Securities Research - 23 Dec 2024