Top Glove - Maybank Research 2023-12-21: Positives More Than Priced In

• While we appreciate Top Glove for its active cost management, improving sales outlook and projected turnaround by FY25, Top Glove's share price has outpaced fundamentals and is now 13% above our MYR0.80 target price (on 1.4x CY25E PBV peg). We downgrade Top Glove to SELL (from HOLD).

On the road to recovery

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Lower losses on higher sales volume

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• The q-o-q decline in 1QFY24 core net loss was driven by stronger sales volume +9% q-o-q and lower natural gas and admin costs, partially offsetting the impact of higher raw material costs and a lower ASP (-8% q-o-q) in 1QFY24.
• Utilisation was 34% in 1QFY24.

Key takeaways from Top Glove's results concall

1. Significant pick up in sales volume (+30%-40%) for Dec 23 - Jan 2024 orders, leading to an expected improvement in the utilisation rate to ≥40% (from 34% in 1QFY24). If the momentum in sales volume continues, there is a chance for Top Glove to achieve turnaround by 4QFY24,
2. Cost savings from enhanced production efficiency due to a higher utilisation rate are expected to offset the increase in raw material costs and natural gas prices. With the surge in glove demand, Top Glove believes it will have stronger bargaining power in pricing, should there be any increase in raw material/natural gas prices,
3. Top Glove plans to resume dividend payments once it becomes profitable.

Maintain earnings forecasts

• Read more at SGinvestors.io.

Wong Wei Sum CFA Maybank Research | https://www.maybank-ke.com.sg/ 2023-12-21 SGinvestors.io

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