MIDF outlook on Top Glove isn’t that rosy, the broking house recently had a briefing session with the top management at the rubber glove maker and gives its evaluation on the company’s performance.
With a deferred expansion plan, Top Glove reported an average utilisation rate of 50% in 9MFY22 due to the normalized global gloves demand. The rate is 37ppt lower than the pre-pandemic level of 87%. Management does not rule out the potential of horizontal consolidation as part of its expansion strategies, yet the mergers and acquisitions activities are not envisaged to be in the next 1-2 years. The group is now concentrating on vertical expansion by constructing its gamma sterilization plant and acquiring internal raw material supply. Management highlighted that the dual listing proposal on the Hong Kong Stock Exchange (HKEX) will remain on hold as overcoming the business challenge is the top priority.
ASPs bottoming the pre-covid levels. The Top Glove Management highlighted a weaker market demand for gloves compared to pre-pandemic years. This is primarily due to an oversupply situation in the industry amid intense competition from China and aggressive capacity expansion by existing and newcomers during the pandemic. MIDF also gathers that buyers appear to be making fewer deals due to a more supply-driven industry where they can rapidly access the supplies. We are aware of risk of ASPs could fall to below pre-pandemic level at USD21-23/1000 pieces, prior to the normalisation of the imbalanced demand-supply dynamics. Note that the average ASPs have been declining nearly -60% from USD60-62/1000 pieces during the pandemic to USD24-26/1000 pieces in 9MFY22.
Margin erosion continues. Management also guided the natural gas tariff to rise by nearly +13% beginning 1 July 2022, which accounted an additional +1.3% to the total cost in FY22F. The price for natural rubber latex is anticipated to normalise after wintering season ends. Yet, MIDF expects higher cost for chemicals and packaging in the near term as it was imported in US Dollar. With weaker demand and intense competition, the broking house believes the margin deterioration is likely to continue to in 2HCY22 amidst the inability to fully pass on the cost
Revised FY22-24 earnings forecast. MIDF cuts the FY22-24F core PATANCI forecast by -2% for FY22F, -4% for FY23F,
and -11% for FY24F. This is after factoring in a higher input cost (in terms of higher natural gas, packaging, chemical, and
fuel cost) to better reflect margin compression. We also adjust our USD/MYR exchange rate assumption to be in line with
MIDF’s economists view of an average of 4.28 by end of 2022.
Reiterate NEUTRAL on Top Glove. MIDF revised its TP to RM1.01 (from RM1.04 previously). Valuation is based on
FY23F earnings of 5.0sen multiplied by PER multiple of 20.39x, in line with its current 5-year historical mean PE. We foresee
the margin deterioration and declining ASPs will likely persist in the near term considering a weaker demand due to endemic
transition. The group’s net cash position could provide some protection against the downside risk. Downside risks to
rating are: (i) a significant depreciation of RM against the US Dollar; (ii) a greater-than-anticipated decline in ASPs; and (iii)
a sharp increase in raw material prices.
