Kenanga Research maintains its forecast for Top Glove Corporation Bhd on achieving a small profit in 2024.
The research house recommendation remains unchanged at MARKET PERFORM, and the target price (TP) of RM0.75 is upheld.
This TP is determined using a multiple of 1.2 times the FY24F BVPS, representing a 40% discount compared to large-cap players in the sector.
This discount aligns with historical trends observed during significant downturns in 2008 to 2011 and 2014 to 2015 when the sector’s average multiple was 1.7 times. The current economic downturn is anticipated to be one of the most severe in history.
Notably, there are no adjustments to the TP based on Environmental, Social, and Governance (ESG) factors, as the research house has assigned it a 3-star rating.
Top Glove’s FY23 financial performance fell short of expectations, primarily due to a significant impairment loss resulting from the decommissioning of production facilities in the fourth quarter of 2023.
For the full fiscal year 2023, the company incurred a substantial net loss of RM926.6 million, a stark contrast from the profit reported the previous year.
This decline can be attributed to weaker average selling prices (ASP), reduced sales volume, and substantial impairment losses associated with the decommissioning of manufacturing plants.
The research house anticipates that the balance between supply and demand in the glove industry will only begin to approach equilibrium in 2025.
This prediction is based on the fact that there will be minimal new capacity added to the market during this period, while global glove demand is expected to continue growing at a rate of 15% annually. This growth is largely driven by increasing awareness of hygiene practices.
Meanwhile, the Malaysian Rubber Glove Manufacturers Association (Margma), forecasts a yearly growth rate of 12% to 15% in global rubber glove demand starting from 2023, following a significant 19% contraction to 399 billion pieces in 2022.
They believe that supply and demand equilibrium may be restored within six to nine months.
However, the research firm holds a different perspective and anticipate that the industry will continue to face overcapacity challenges for at least the next 12 months.
“Our own projections align with a 15% increase in glove demand for 2023, consistent with Margma’s forecast. However, on the supply side, we have already considered a reduction of 24 billion glove pieces in the market by the end of 2023.
“Despite this improvement, there will still be an excess capacity of 112 billion pieces, similar to the levels seen in 2022.
“Consequently, the issue of overcapacity is expected to persist, resulting in low prices and subdued plant utilisation rates continuing to impact the industry throughout the remainder of 2023,” it said.
