Top Glove - RHB Invest 2021-12-13: Poor Utilisation Rates Moving Forward; Downgrade To SELL


Top Glove - Poor Utilisation Rates Moving Forward; Downgrade To SELL

  • Downgrade Top Glove to SELL from Neutral, with a lower DCF-derived target price of MYR1.42 from MYR2.85, 34% downside.
  • Top Glove's 1Q22 earnings came below our and consensus’ expectations due to subdued demand, leading to poor utilisation rates.
  • Moving forward, we believe its outlook remains challenging as its over-expansion will lead to further prolonged periods of poor utilization and margins deterioration.

Top Glove's 1Q22 net profit came below our expectations

  • Top Glove (SGX:BVA)'s 1Q22 net profit came below our expectations, at 12% of our and 9% of consensus’ estimates. Top Glove’s core net profit of MYR174m had a 93% decline y-o-y due to poor utilisation rates and raw material prices declining slower relative to ASP trends.
  • Dividend of 1.2 sen has been declared by Top Glove for the quarter, implying a payout ratio of 52%.

ASPs approaching pre-COVID levels.

  • For 1Q22, nitrile and natural rubber glove prices declined 36% and 28% q-o-q to US$37 and US$29 per 1,000 pcs respectively. Management shared that current prices for nitrile gloves is hovering between US$25-30 while latex gloves ranges between US$22-26.
  • We expect price erosion to continue as energy prices normalize in China and the company is likely to undercut prices further, to boost utilisation rates. However, the quantum of decline would likely be smaller as we approach pre-COVID levels and would mirror raw material price trends.

Raw material prices did not ease as quickly as ASPs.

  • Average latex concentrate and nitrile butadiene prices declined to MYR5.09/kg (-10% q-o-q) and US$1.79/kg (-19% q-o-q) respectively in 1Q22. However, Top Glove expects nitrile butadiene prices to moderate further to US$1.08/kg for the month of Jan 2022, as butadiene prices have declined on the back of additional supply and lower crude oil prices.

Unfavourable utilisation rate of 55%

  • Unfavourable utilisation rate of 55% for the quarter was attributed to the continued subdued demand and over-expanded capacity over the past two years. We believe Top Glove attempted to boost its sales by underpricing its products (below peers) but capped by the still elevated raw material prices.
  • Going forward, we believe its utilisation rate would remain sub-optimal given its planned expansion plans (+11% in 2022) that will be fuelled by the recently approved dual listing on HKEX. 1Q22 sales volume only came in at 15% of our full year estimates.

Top Glove - Earnings forecast revision and recommendation

  • We slashed our earnings forecast for Top Glove by 60/50/45% for FY22-24F, after revising downwards our sales volume assumptions by 18-26%. Additionally, we trimmed our normalized nitrile ASP to US$24 (from US$27 previously) to account for the latest price trends. We did not input any impact from the announced prosperity tax as Top Glove’s earnings would be distributed across eight subsidiaries, and resulting in a minimal impact.
  • Downgrade Top Glove to SELL, with lower target price of MYR1.42. Our target price implies 18x 2023 P/E, in line with its 10-year mean.
  • As its ESG score stood in-line with country median, we ascribed a zero ESG discount/premium to our target price.
  • See
  • Risks: Higher/lower-than-expected ASPs, rapid /deferred capacity expansion, higher/lower utilisation rates, US$/MYR movement and raw material price movements.

Sean Chew RHB Securities Research | https://www.rhbgroup.com/ 2021-12-13
SGX Stock Analyst Report SELL DOWNGRADE NEUTRAL 0.44 DOWN 0.89