Excerpts from CGSCIMB report

Top Glove Corporation (SGX: BVA)

• 1QFY8/23 core net loss of RM152.7m was a surprise, due to lower-thanexpected sales volume and ASP.
• We believe TOPG would still record losses in 2Q-3QFY23F due to weaker ASPs and slow demand, before returning to the black in 4QFY23F.

Reiterate Reduce with a lower TP of RM0.46 (20x CY24F P/E).

Top Glove 1QFY8/23 core net loss of RM152.7m

Top Glove Corporation (TOPG) recorded a core net loss of RM152.7m in 1QFY8/23, after stripping out one-off losses of RM15.5m (mainly RM11.4m allowance for inventories written down). 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.

Weak quarter on account of weak ASPs and sales volume

1QFY8/23 revenue declined to RM632.5m (-36.1% qoq/-60.7% yoy), owing to lower sales volume (-32% qoq/-48% yoy) and weak ASPs (-8% qoq/-34% yoy) due to low demand (customers have high inventory levels) and rising pricing competition (supply glut in the market). TOPG also recorded a negative EBITDA margin of 8.0% (-18.0% pts qoq/-32.2% pts yoy), due to rising cost pressures (minimum wage hike, higher natural gas tariff, and global supply chain disruptions). This led TOPG to record a core net loss of RM152.7m.

Expecting weaker qoq results in 2Q-3QFY23F

We estimate TOPG’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, while we gather that TOPG has started seeing an improvement in demand. Note that we are forecasting TOPG to still record losses in 2Q-3QFY23F, albeit narrower on a qoq basis, before returning to the black in 4QFY23F.

Slowing down capacity expansion plan in view of market weakness

In view of the low sales volume and continuous ASP pressure, TOPG 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 it 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). We also assume TOPG will not pay dividends for FY23F as we expect it to report a net loss for the year.

Top Glove valuation/recommendation

We lower our FY23-25F EPS estimates to account for weaker-than-expected sales volume and ASPs. Accordingly, our TP is lowered to RM0.46 (20x CY24F P/E, in line with its 10-year historical mean). We reiterate our Reduce call as we believe that current valuations (above +2 s.d. 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.

You can find the full report here and the company website here.