Confidence back on Top Glove as worst is likely over?

THERE are now mixed signals about prospect of Top Glove Corp Bhd with CGS-CIMB Research having upgraded the world’s largest glove maker to “hold” (from “reduce” previously) on grounds that “the worst is over” and that “increases in ASPs (average selling prices) and sales volume can be expected going forward albeit gradually”.

In so doing, the research house also raised Top Glove’s target price to 82 sen (from 46 sen previously) as it switched its valuation methodology to that of the price-to-book (P/B) ratio from the P/E (price-to-earnings ratio) methodology which is unable to reflect Top Glove’s true value given the weak operating environment in the global glove sector.

This comes even as the group’s 2Q FY8/2023 core net loss was weaker than expected at RM167.2 mil which was wider than 1Q FY8/2023’s net loss of RM152.7 mil which brought its 1H FY8/2023’s core net loss to RM316.8 mil which was far below expectations.

This is given that the research house’s has projected a net loss of RM311.0 mil for the entire FY8/2023F while Bloomberg consensus estimated a net loss of RM196.0 mil for the said financial year.

“We gather that Top Glove expects higher ASPs from 3Q FY8/2023F in-line with collective global glove industry efforts to raise ASPs to pass on higher input costs,” noted analyst Walter Aw in a results review.

“However, we believe the quantum of ASP hikes at this juncture (+10% quarter-on-quarter [qoq] up to end-3Q FY8/2023F) remains insufficient to fully pass on the higher costs.”

RHB Research also upgraded Top Glove to “neutral” (from “sell” previously) with a higher DCF (discounted cash flow)-derived target price of 88 sen (from 57 sen previously).

“Top Glove Corp sank deeper into the red in 1H FY8/2023, no thanks to the elevated energy prices and suboptimal industry utilisation rate given that customers are still refusing to commit to bulk orders as the demand-supply dynamics remain imbalanced,” opined analyst Oong Chun Seng.

“Positively, China peers are said to have engaged in cost pass-through initiatives in February which will eventually narrow the price gap with Malaysian glove makers.”

Meanwhile, Maybank IB Research reiterated its “sell” rating on Top Glove but raised its target price to 57 sen (from 35 sen previously).

“We now expect Top Glove’s FY8/2023 net loss to expand to RM507 mil (+56%), continuing into FY8/2024 with a RM154 mil loss (vs RM204 mil net profit previously) and Top Glove to only turnaround in FY8/2025,” projected analyst Wong Wei Sum.

“This is after factoring in (i) lower average plant utilisation rate of 33%/50%/60% from 40%/60%/65% for FY2023/2024/2025E and (ii) higher blended ASP assumption of US$21/US$22/US$23 per 1,000 pieces (from US$20/US$21/US$22) for FY2023/2024/2025E.”

Added the research house: As of end-February 2023, Top Glove had RM272 mil net cash or 3 sen/share. To preserve cash, Top Glove has halted dividend payment.”

At 11.10am, Top Glove was up 0.5 sen or 0.6% to 84 sen with 111.38 million shares traded, thus valuing the group at RM6.89 bil. – March 17, 2023

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