WHILE Top Glove Corp Bhd has managed to maintain its presence as a FBM KLCI constituent in the most recent semi-annual review, Hong Leong Investment Bank (HLIB) Research warns that the glove maker is at risk of being booted out in the 2H semi-annual review expected in December 2022.
Based on the research house’s analysis, Top Glove is currently ranked at the 37th spot with a market capitalisation of RM10.3 bil.
“Should its share price continue to deteriorate and Top Glove falls below the 35th spot, the company could be removed from the FBM KLCI in the semi-annual review later this year,” justified analyst Sophie Chua Siu Li in a company update.
Against such uncertainty, HLIB Research has kept its “sell” rating on Top Glove but trimmed the company’s target price to RM1.12 (from RM1.33 previously) subsequent to an earnings cut and rolling over to FY8/2023F (the target price represents a valuation of 17.3 times price-to-earnings ratio on its FY8/2023F earnings per share of 6.5 sen).
Yesterday (June 2), FocusM highlighted how the world’s largest glove maker had come so close to toppling Malayan Banking Bhd (Maybank) as the largest listed entity on Bursa Malaysia during the height of the COVID-19 pandemic. Today, the counter is merely a pale shadow of its glorious past.
According to HLIB Research, the operating environment for Top Glove remains competitive, no thanks to the demand-supply mismatch situation as demand from customers have yet to normalise.
Softening demand has resulted in a low utilisation rate of circa 60% currently (based on an installed capacity of 100 billion glove pieces).
“ASP (average selling price)-wise, Top Glove is still expecting to see some decline albeit at a lower rate of 2%-3% month-on-month (mom) (vs 5%-10% mom previously),” projected the research house.
“Nitrile glove’s pricing in May was circa US$24/1,000 pieces while powdered gloves and powder-free gloves are priced at US$21 and US$26 respectively.”
That said, the research house noted that sales to the US have been seeing a 10% mom improvement since the lifting of Top Glove’s import ban in September last year (the company has recovered close to 60% of its pre-COVID order book).
However, HLIB Research cautioned that Top Glove will not to be spared from the high inflationary environment as manpower costs are expected to rise following the recent minimum wage revision.
“However, we find comfort that the revision does not translate to a RM300 adjustment across all workers’ wages as some are paid above the previous minimum wage of RM1,200,” opined the research house. “The management foresees this to result in less than 10% increase to its labour cost component.”
However, Top Glove will likely be hit by higher utilities, natural gas and raw material costs, leading to margin pressures as the cost pass through mechanism has yet to normalise.
“We note that the rising raw material cost for nitrile glove was unable to be passed on completely due to the vast nitrile glove supply available in the market,” observed HLIB Research.
“Higher natural gas, electricity and wages is estimated to cause a 4% increase to total production cost.”
At 10.11am, Top Glove was down 1 sen or 0.79% to RM1.25 with 9.7 million shares traded, thus valuing the company at RM10.26 bil. – June 3, 2022
