Top Glove - Maybank Research 2022-12-15: Losses Deepen

• Top Glove’s 1QFY23 results – net loss of RM168mil (+2.2x q-o-q; RM186mil net profit in 1QFY22) were below our/consensus estimates.
• Near-term outlook remains challenging due to low utilisation rate of 30% (on effective capacity) no thanks to on-going inventory depletion activities at the customers’ end and stiff competition especially from the China counterparts.
• We lower our core net profit forecasts for Top Glove by -26% to -280% and target price to RM0.35 (-18sen; on an unchanged 13x CY24E PER). SELL.

Hit by low plant utilisation rate

• Including RM11mil inventory write down on unsold goods, Top Glove (SGX:BVA) reported a RM168mil net loss in 1QFY23 versus MIBG/consensus FY23E net profit of RM179mil/184mil.
• The weaker-than-expected 1QFY23 earnings was due to lower-than-expected utilisation rate of 24% on total capacity (vs. our assumption of 50% for 1QFY23) and the inventory write down. 1QFY23’s losses were also due to lower ASP (-31% y-o-y, -8% q-o-q) and sales volume (- 48% y-o-y) as well as higher energy costs.

Key takeaways from concall with Top Glove's management

• Top Glove is unable to raise its selling price due to the stiff competition amid an oversupply environment. To recap, it had intended to raise its ASP by +5% and to resume its pre-pandemic’s widely-used cost-plus pricing in Sep 2022,
• Top Glove will prioritise cash flow over profitability for now. It has lowered its ASP (to below US$20/kpcs) to secure sales and raise plant utilisation rate,
• ASP is stablising or declining at a slower pace in recent months,
• Top Glove will focus on strengthening/optimising its cost structure and temporarily shut down old/inefficient factories, and
• it does not discount the possibility to distribute its treasury shares as stock dividend.

Top Glove – Earnings adjustments

• We lower our FY23/24/25 earnings forecasts for Top Glove by -280%/-26%/-45% after factoring in:
  1. lower utilisation rate of 40% (from 55%) for FY23E while maintaining 60%/65% for FY24/FY25E and
  2. lower blended ASP assumption of US$20/k pcs (from US$21.5) for FY23E.
• We now expect a net loss of RM322.8mil for Top Glove in FY23E.
• As at end-Nov 2022, Top Glove had RM360mil net cash or RM0.04 per share. To preserve cash, Top Glove has halted dividend payment.