Headwinds still lingering for Top Glove and fellow glove makers

TOP Glove Corp Bhd’s investors should brace for a dilutive effect of 9.02% following the world’s largest glove maker’s proposed dual primary listing on the Hong Kong Exchange (HKEX) which is slated for completion in 1Q CY2022.

According to Hong Leong Investment Bank (HLIB) Research, this is given Top Glove plans to issue a maximum of 793.5 million shares (assuming over-allotment option fully exercised) and could raise up to RM2.27 bil (assuming issue price of RM2.86 per share) for the group.

“Bulk of the proceeds raised will be used for the expansion of production capacity involving six new manufacturing plants in total,” noted analyst Sophie Chua Siu Li in a company update following a virtual meeting with Top Glove’s management.

“Overall we are neutral on this exercise as the positives from a larger war chest and larger pool of potential investors is balanced by the dilutive effect.”

Against such backdrop, HLIB Research is keeping its “hold” call on Top Glove with an unchanged target price of RM2.80 given the average selling price (ASP) decline of gloves going forward is expected to be less steep.

“We opine that the headwinds are likely to remain in the short term,” projected the research house. “Concerted effort from the industry players are also required to not tilt the market into an oversupply situation.”

In a related development, HLIB Research said Top Glove’s exports to US have resumed in end-September following lifting of the US Customs Border Protection’s (CBP) bans.

“We understand that sales to the US is still recovering gradually but have yet to reach pre-CBP ban levels as the buyers have redirected their purchases to other glove makers during the CBP-ban,” reckoned the research house.

“To date, Top Glove has recovered approximately half of its pre-CBP ban shipment volume to the US.”

More broadly, demand remains soft which has led to a lower utilisation rate of circa 60% currently (pre-pandemic: 80-85%; peak of pandemic: 95%).

“Lead time has since fallen considerably as well and is currently back at pre-COVID levels of 30-45 days,” HLIB Research pointed out. “Lead time for nitrile gloves is at circa 30 days now, while the lead time for latex gloves is slightly higher at circa 40 days.”

At 10.16am, Top Glove was down 17 sen or 6.05% to RM2.64 with 13.08 million shares traded, thus valuing the company at RM 21.67 bil. – Dec 6, 2021

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