AMID a bleak prospect of the glove sector returning to the pre-COVID-19 margins, CGS-CIMB Research has downgraded Top Glove Corp Bhd to “reduce” (from “hold” previously) while slashing its target price to RM1.50 (from RM3 previously).
The research house said it continues to expect the world’s largest glove maker to post weaker quarter-on-quarter (qoq) results mainly due to easing demand as the COVID-19 pandemic comes under control.
“This has led to weaker average selling prices (ASPs) for gloves due to incoming new global glove supply and slower customer buying patterns,” justified analyst Walter Aw in a results review.
“We also gather that customers are keeping inventory levels low in view of declining ASPs as well as well capacity coming onboard globally.”
According to CGS-CIMB Research, Top Glove’s 1Q FY8/2022 core net profit came in at RM185 mil (-92.8% year-on-year) after stripping out one-off gains of RM700,000 (disposal of debt securities).
This was below the research house’s expectations at 8.5% and 10.7% of Bloomberg consensus full-year estimates which it attributed to lower-than-expected sales volume and sharper-than-expected decline in ASPs.
Top Glove declared an interim dividend of 1.2 sen/share (52% dividend payout) which was below expectations due to its 1Q FY8/2022 net profit missing expectations.
“We cut our FY8/2022-2024F earnings per share (EPS) to account for a further decline in ASPs (US$27/US$26/US$26 from US$32/US$29/US$28 per 1,000 glove pieces previously),” noted CGS-CIMB Research.
“Accordingly, our target price falls to RM1.50 (19 times CY2023F price-to-earnings ratio) in line with Top Glove’s five-year mean as we believe that current valuations (46% premium over its five-year mean) have yet to account for further downside to its earnings while the operating environment remains weak.”
Maybank IB Research also reiterated its “sell” call on Top Glove with a lower target price of RM1.61 (from RM1.68 previously) as the research house lowered its FY2022/2023/2024 EPS forecasts by -27%/-5%/-4%.
“We now assume (i) FY2022/FY2023/FY2024 ASP of US$24.40/US$21.20/US$21.20 per 1,000 glove pieces; and (ii) prosperity tax,” opined analyst Wong Wei Sum.
“We have not factored in additional number of shares of up to 794 mil from its Hong Kong listing which is slated to be completed by early 2022. The additional shares could dilute our EPS estimates by 9%.”
At 9.53am, Top Glove was down 9 sen or 4.17% to RM2.07 with 11.94 million shares traded, thus valuing the company at RM16.99 bil. – Dec 13, 2021
