THE good news for Top Glove Corp Bhd is that many impromptu or late-comer small-sized glove players who entered the marketplace at the height of the COVID-19 pandemic are languishing.
As revealed by Hong Leong Investment Bank (HLIB) Research, these small players are looking to exit the industry completely due to the intense competition and tough operating environment.
While this would help ease the oversupply situation slightly, the research house reckoned that more is needed from all major glove makers to normalise the current state of demand-supply mismatch.
“Top Glove has also indicated that it is not in a hurry to acquire more glove plants as it still has idle capacity to be filled currently,” analyst Sophie Chua Siu Li pointed out in a results review of the world’s largest glove maker.
According to HLIB Research, Top Glove’s 3Q FY8/2022 core net loss of -RM8.6 mil (2Q FY8/2022: RM91.5 mil; 3Q FY8/2021: RM2.02 bil) brought its 9M FY8/2022 core net profit to RM255.8 mil (-97% year-on-year) which is below both its and consensus estimates at 50% and 49% respectively.
This led the research house to lower its projections for FY8/2022-FY8/2024F by 18%-47% as it slashed its forecast of utilisation rates for FY8/2022F/2023F/2024F to 60%/78%/81% to better reflect the tough operating environment.
“Consequently, our target price is lowered to 82 sen (from RM1.12 previously), representing a PE (price-to-earnings) multiple of 17.3 times on its FY8/2023F EPS (earnings per share) of 4.8 sen. Reiterate “sell” on Top Glove,” noted HLIB Research.
“We think that the headwinds faced (higher operating costs and utilisation rates below pre-pandemic levels) by gloves players currently will persist for a bit longer given that the demand-supply imbalance has yet to normalise.”
That said, the research house expects Top Glove’s utilisation rate to still see small improvements on a quarter-on-quarter (qoq) basis as its sales volume to the US continues to recover.
Meanwhile, CGS-CIMB Research retained its “reduce” rating on Top Glove but lowered the glove maker’s target price to RM1 to account for lower sales volume and average selling price (ASP) decline in tandem with its lowering of the company’s FY8/2022-FY8/2024 EPS forecasts.
“In our view, Top Glove’s ASP has likely bottomed in 4Q FY8/2022F (we expect a 5% qoq decline) at US$22/1,000 pieces,” opined analyst Walter Aw.
“Yet, we believe this does not indicate that sector supply-demand dynamics improved as customers are keeping low inventory levels (slower buying patterns) while new capacity is still aggressively added in the sector.”
“We believe this is due to recent cost hikes and expect lower margins in near-term despite a pick-up in sales going forward,” added CGS-CIMB Research.
Elsewhere, TA Securities Research also maintained its “sell” call on Top Glove with a further reduction in its target price to 93 sen (from RM1.27 previously) as it expects the challenging operating environment to persist over the next two quarters with plant utilisation rates expected to hover at 50%-60%.
“Moving into 4Q FY8/2022, we expect the ASP to decline by about 2% month-on-month,” projected analyst Tan Kong Jin.
“We gather that it is not as easy as before to pass through the cost increases due to the current oversupply situation. Positively, the management opined that margins would be flattish on a qoq basis due to the decrease in raw material prices.”
At 9.36am, Top Glove was down 6 sen or 4.92% to RM1.16 with 16.21 million shares traded, thus valuing the company at RM9.52 bil. – June 10, 2022
