WHILE Top Glove Corp Bhd – the world’s largest glove maker – has successfully raised its average selling price (ASP) to circa US$21 per 1,000 glove pieces, its upcoming 3Q FY8/2023 earnings are expected to remain in the red due to low plant utilisation of lesser than 40%.
Its effective capacity has decreased by 40% on decommissioning of two factories and placing another 16 plants on idle, according to Maybank IB Research.
“Given the persistent oversupplied situation, losses may persist in the near term,” projected analyst Wong Wei Sum in a company update. “We maintain our earnings forecasts, target price of 57 sen (half of yesterday’s closing price of RM1.13) and a ‘sell’ rating as we await the release of its 3Q FY8/2023 results on June 16.”
The decommissioning of the group’s two old plants with 5 billion pieces/year capacity in addition to the temporary shutdown of another 16 plants with 35 billion pieces/year capacity has led to a significant decrease in effective capacity to 60 billion pieces/year from 100 billion pieces/year.
“We understand that the decommissioning process is unlikely to result in significant impairment loss as the old factories were nearing fully depreciation. As for the 16 idle glove plants, operations can resume within one to two months once demand picks up,” suggested Maybank IB Research.
Delving further, the research house reckoned that while Top Glove has managed to raise its average selling price to circa US$21 per 1,000 pieces (from US$17-US$19), this has an impact on both sales volume and plant utilisation rate, especially amid an oversupplied market condition.
“The plant utilisation rate currently stands at circa 20% based on 100 billion capacity (or circa 36% on 60 billion effective capacity),” observed Maybank IB Research.
“It seems that further increases in ASP may not be feasible at this point as Top Glove is facing strong resistance from its customers. On a positive note, it expects demand to pick up significantly in 4Q CY2023 once de-stocking activities are over.”
In the immediate future, the research house expects Top Glove to prioritise cash flow over profitability, hence the glove maker has undertaken various cost rationalisation exercises.
“These include consolidating resources to more efficient factories and reducing staff count by 50%,” justified Maybank IB Research. “Despite achieving a higher ASP and lower energy cost, we anticipate that its upcoming results will still reflect losses due to low plant utilisation rate.”
At 9.13am, Top Glove was down 1 sen or 0.88% to RM1.12 with 251,100 shares traded, thus valuing the company at RM9.19 bil. – June 8, 2023
