Top Glove - UOB Kay Hian 2022-06-10: 3QFY22 Results Disappoint As Market Dynamics Remain Soft


Top Glove - 3QFY22 Results Disappoint As Market Dynamics Remain Soft

  • Earnings disappointed as ASPs remain soft given the imbalance in demand-supply dynamics. Amid rising inflationary costs, Top Glove may have difficulty passing on its cost increases.
  • Positively, Top Glove remains operationally profitable unlike its smaller listed peers and major China producers.
  • Top Glove may drop out of the FBMKLCI Index in the next review given the decline in its market capitalisation.
  • Maintain HOLD with a lower target price of RM1.15.

Top Glove's 3QFY22 Below Expectations.

  • Top Glove (SGX:BVA)’s 3QFY22 core net profit of RM15.3m (-82.5% q-o-q, -99.2% y-o-y) brought 9MFY22 core profit to RM288.6m (-96.1% y-o-y). This was below our and consensus’ expectations, with cumulative earnings accounting for 65% and 55% of our and consensus full-year estimates respectively.
  • The negative deviation was due to prevailing soft ASPs. Demand-supply dynamics remain highly delicate.

ASPs continued to decline but volume grew q-o-q.

  • Top Glove's 3QFY22 revenue of RM1,465m realised flattish growth q-o-q at 1.1% (-64.8% y-o-y). Overall volume grew 6% q-o-q, aided by an 8% q-o-q recover in US sales, as ASPs declined 5% q-o-q. In terms of nitrile gloves, volume sales improved by 17% q-o-q but declined 15%.
  • Meanwhile, the US dollar strengthened against the ringgit by 2.1%. While ASP declined at a slower pace, management attributed the decline to ample supply from China producers and exiting producers holding fire sales of their inventories, sparking a false signal on ASPs.
  • Going forward, ASPs are expected to remain range bound as imbalanced demand-supply dynamics are expected to persist in the near term. Deferring expansion plans by major producers will help achieve demand-supply equilibrium. Furthermore, smaller cap producers in Malaysia have on average, realised operational earnings losses over 1Q22.

Razor-thin margins but yet to find a bottom.

  • EBITDA margin softened out the possibility of margins deteriorating further.

Capacity expansion deferred further.

  • Top Glove has deferred its capacity expansion plans further. 2022 will now not see any capacity expansion (down from 109b pieces). Meanwhile, 2023's ending capacity target has been adjusted to 110b pieces from 131b pieces. This is in line with its peers who are also deferring capacity expansion to 2H22.

Top Glove - Earnings forecast revision & recommendation

Philip Wong UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.47 DOWN 0.490