Top Glove Corporation Berhad - Splendid turning point, but below expectations
Fri, 11-Oct-2024 07:49 am
by Chelsea Chew • Apex Research

Counter

TOPGLOV (7113)

Target Price (RM)

1.26

Recommendation

Buy

Summary

 

  • Top Glove’s 4QFY24 core net loss at -RM3.6m, bring core net loss of -RM116.2m came below our expectations of -RM70.0m, premised to sharp depreciation in USD against MYR.

  • Better prospects ahead due to stock replenishment, as the new tariff on Chinese glovemakers will take effect in January 2025, and Malaysian glovemakers now have better pricing power.

  • We upgrade to BUY recommendation with a slightly higher target price of RM1.26 derived from 1.7x to FY26F BV.

     

Results Review

 

  • Results review. Top Glove's 4QFY24 core net loss narrowed to -RM3.6m, while top-line ended with higher sales revenue of RM835.3m. This improvement is attributed to stronger sales volume growth driven by the continued replenishment of glove inventories. Despite challenges from sharp USD depreciation, better economies of scale arising from improved sales volume mitigated the impact. 

 

  • Below expectations. 12MFY24 core net loss narrowed to -RM116.2m, which came below both our expectations and consensus (-RM70m and -RM144m respectively). Nevertheless, the Group closed FY24 with a positive EBITDA due to higher utilisation rate driven by higher demand.

 

  • Bonus issue of warrants proposal. The group is granting shareholders 1 warrant for every 20 existing Top Glove shares, pending approval at the January 2025 AGM. The warrants, exercisable within 5 years, will strengthen the capital base and allow shareholders to increase their equity participation without incurring additional interest expenses. 

 

  • Operations Highlights. Top Glove recorded 31% qoq increase in sales volume. No shipments delay in this quarter, demonstrating strong performance in both nitrile and natural rubber (NR) gloves, registering 43% qoq and 19% qoq increase respectively. The high volume was mainly driven by North America, which saw a 117% qoq increase. This led to a better pricing power, allowing the Group to pass some costs onto customers. The Group also plans to redeem the Perpetual Sukuk scheduled for call in February 2025 and is looking for Senior Sukuk instead of Perpetual Sukuk in the future.

 

  • In this quarter, there are additional non-core contributions of RM42m, mainly from the sale of land and buildings of the China factory, which were subject to compulsory acquisition by the government at market price. In addition, the Group has established a trading company, Great Glove (Su Zhou) Co. Ltd., which is a JV with local small vinyl glove makers.

 

  • ASPs for nitrile glove rose by 7% qoq, while NR latex increased by 3% qoq, despite substantially higher raw material costs. Stronger demand and high tariffs on Chinese glovemakers in 2025 facilitated the adoption of a cost-pass-through mechanism. The Group experienced high operating costs, mainly due to the sudden weakening of the USD against the MYR in August, as 40% of the costs were denominated in USD.

 

  • Industry Highlights. i) The NR latex experienced a slight decline in this quarter (currently at USD 1.65/kg) but is expected to show an increasing trend with c.3.6% in the next quarter due to heavy rainfall in Thailand. ii) In contrast, nitrile (currently at USD 0.99/kg) has seen a reversal; it increased by c.8% this quarter but is declining in the current trend for the next quarter. Due to favourable demand, the Group plans to pass on raw material price increase to customers. However, there will be some time lag, with contributions expected to start in November.

 

  • Outlook. Strong demand for gloves is expected to persist due to stock replenishment and US customers outsourcing to Malaysian manufacturers ahead of c.50% tariff on Chinese imports effective January 1, 2025. No medical gloves are anticipated to ship from China after mid-November (with 1.5 months shipment time). ASPs (USD20-21/’000 pcs) have been adjusted for higher raw material costs, while supply from China is not expected to expand in the next 1 to 2 years. The Group is expecting to ramp up the utilisation rates to improve production efficiency and profit margins, despite volatile raw material prices. Additionally, the Group expected to increase running capacity to 64.0bn pcs by December 2024.

 

  • Valuation. Trimmed our GP margin from 16.0% to 10.0% for FY25F, due to higher input costs and a weakening USD trend (as c.40% costs are denominated in USD). We also tweak the depreciation rate in FY25F from 8.5% to 7.0%, as the Group is considering new technological advancements in the existing factory to reduce manpower, moving forward.  We are also introducing FY26F earnings at RM107.5m (+84.4%). Consequently, we upgrade our call on TOPGLOV to BUY with a slightly higher target price of RM1.26 by assigning same 1.7x BV to FY26F. We adopt the P/B valuation method as a better measure to reflect in the Group’s fundamentals. 

 

  • Risk. Volatility in raw material prices and currency exchange rates will impact ASPs and margins.

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Opinions, estimates and projections in this report constitute the current judgment of the author. They do not necessarily reflect the opinion of Apex Securities Berhad and are subject to change without notice. Apex Securities Berhad has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

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Market Mover
Settlement Rates
Currency Buy Rates (RM) Sell Rates (RM)
USD 4.455268 4.488135
EUR 4.716585 4.723137
CNY 0.616518 0.616862
HKD 0.572409 0.576643
SGD 3.318330 3.343262