Top Glove - Unexpected Loss
- Top Glove (SGX:BVA) recorded a core net loss of RM152.7m in 1QFY23 (Sep 2022 to Nov 2022), after stripping out one-off losses of RM15.5m (mainly RM11.4m allowance for inventories written down) – see Top Glove's announcement dated 14 Dec 2022. This was a negative surprise as we and Bloomberg consensus forecasted FY23F net profit of RM41.6m and RM175.7m, respectively. We attribute this to lower-than-expected sales volume and average selling prices (ASPs). No dividend was declared, within expectations.
- Top Glove's 1QFY23 revenue declined to RM632.5m (-36.1% q-o-q/-60.7% y-o-y), owing to lower sales volume (-32% q-o-q/-48% y-o-y) and weak ASPs (-8% q-o-q/-34% y-o-y) due to low demand and rising pricing competition.
- Top Glove also recorded a negative EBITDA margin of 8.0% (-18.0% points q-o-q/-32.2% points y-o-y), due to rising cost pressures (minimum wage hike, higher natural gas tariff, and global supply chain disruptions).
- We estimate Top Glove’s utilisation rate was 30-35% with nitrile ASP at US$19-20/1k pieces in 1QFY23. We expect further weakness in nitrile ASP in 2QFY23F to US$18-19/1k pieces (to stabilise within this range), while we gather that Top Glove has started seeing an improvement in demand.
- In view of the low sales volume and continuous ASP pressure, Top Glove has been slowing down its capacity expansion plans substantially (CY23/24/25F: +0%/+4%/+11%); its capacity stood at 100bn pieces p.a. at end-1QFY23. We understand that Top Glove has deferred all capex allocated for capacity expansion purposes, in order to strengthen its cashflow as well as maintain its net cash position (RM359.5m at end-1QFY23).
- Note that we are forecasting Top Glove to still record losses in 2Q-3QFY23F, albeit narrower on a q-o-q basis, before returning to the black in 4QFY23F.
- We also assume Top Glove will not pay dividends for FY23F as we expect it to report a net loss for the year. See Top Glove's dividend history.
- We lower our FY23-25F EPS estimates for Top Glove to account for weaker-than-expected sales volume and ASPs. Accordingly, our target price for Top Glove is lowered to RM0.46 (20x CY24F P/E, in line with its 10-year historical mean).
- We reiterate our REDUCE call on Top Glove as we believe that current valuations (above +2 standard deviation of its 10-year mean) have yet to fully account for its weak near-term outlook as well as the supply-led industry dynamics in the global glove sector.
Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.
Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2022-12-14 2022-12-14
Previous report by CGS-CIMB:
2022-09-20 Top Glove - Tough Times Remain Ahead.