Has the positive news from CBP come a little too late for Top Glove?

TOP Glove Corp Bhd’s recent announcement that it has been allowed to sell its Malaysia-made gloves to the US is a positive development which has alleviated the company’s ESG (environment, social and governance) concerns.

Although AmResearch has upgraded its ESG rating of the world’s largest glove maker to three stars (from two stars previously), the research house has maintained its “hold” rating on Top Glove (with a higher fair value of RM3.77 from RM3.66 previously) given positive news from the ESG perspective could be offset by prospect of lower average selling prices (ASP).

To re-cap, the US Customs and Border (CBP) has granted Top Glove the green light effective last Friday (Sept 10) to sell its gloves in the US as it now believes that Top Glove’s disposable gloves are no longer produced or manufactured in any part with forced labour.

“Due to higher incoming supply of gloves in the near term, we believe that ASP should decline in 3Q and 4Q of 2021,” projected the research house. “As a result, the positive impact from the removal of the CBP ban is offset by lower earnings for FY2022 and FY2023.

Nevertheless, AmResearch opined that the news could boost Top Glove’s share price as it may potentially improve the company’s ESG perception.

“We have raised our ESG score for ‘occupational safety + health’ and ‘employee training + well-being’ to three stars. The previous rating for these two categories is two stars.”

Meanwhile, CGS-CIMB Research downgraded Top Glove to “hold” from “add” by more than halving its target price to RM3.48 (from RM7.80 previously) given the glove maker should continue to face weaker ASPs going forward despite the lifting of the CBP ban due to incoming new global glove supply and slower customer buying patterns.

“According to Top Glove, its September ASP (per 1,000 pieces) is at US$40-45 (3Q FY2021: US$89) for nitrile and US$35-40 for natural latex (3Q FY2021: US$56),” observed analyst Walter Aw.

“This is lower than expected, leading to cuts in our FY2021F/2022F/2023F ASP estimates for nitrile (US$69/US$35/US$29 per 1,000 pieces) and natural latex (US$41/US$29/US$26 per 1,000 pieces).”

In CGS-CIMB Research’s view, Top Glove’s current valuation has accounted for potentially weaker earnings ahead while there is a lack of near-term catalysts.

“We believe that current valuations are fair as it is trading at 16.8 times CY2023F P/E (price-to-earnings ratio) which is near its five-year mean P/E,” added the research house.

At 9.52am, Top Glove was down 6 sen or 1.75% to RM3.37 with 5.89 million shares traded, thus valuing the company at RM27.66 bil. – Sept 13, 2021

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