Summary
Top Glove’s (TOPG) 2QFY25 core net profit of RM23.3m (from core net loss from RM21.5m in 1QFY25), bringing 1HFY25 CNP to RM1.8m has missed expectations, accounting for only 6.1% and 1.1% of ours and consensus full-year forecasts.
Key deviation is due to weaker-than-expected recovery in demand, higher-than-expected tax and depreciation expenses.
Glove industry outlook remains challenging due to US frontloading at end-2024, increased Chinese competition in non-US markets, and potential prolonged oversupply.
Re-iterate HOLD recommendation with a lower target price of RM0.92 (from RM1.25), based on lower P/B multiple of 1.3x pegged to FY26F BVPS of 0.70, ascribed with three-star ESG rating.
Missed expectations. core net profit of RM23.3m (from core net loss from RM21.5m in 1QFY25), bringing 1HFY25 CNP to RM1.8m has missed expectations, accounting for only 6.1% and 1.1% of ours and consensus full-year forecasts.
QoQ. Excluding reversal of inventory write-downs (RM6.9m), unrealised forex loss (RM5.2m), and a PPE write-off and gain in money market funds (RM5.3m), TOPG posted a CNP of RM23.3m in 2QFY25, reversing from a net loss of RM21.5m previously. The improvement was driven by stronger sales of Natural rubber gloves (+6% volume) and improved margins from Nitrile gloves. Nitrile ASPs rose 3% to USD 19-20/carton, while raw material costs fell 9%. Despite that, CNP missed expectations due to weaker-than-expected sales volume, higher-than-expected taxes (+455.0% qoq) and increased depreciation from higher operational activities (+4.3% qoq).
YoY. Core net profit returned to profitability, reaching RM23.3m in 2QFY25, compared to a core net loss of RM56.8m in 2QFY24, due to the aforementioned reasons.
YTD. For 1HFY25, TOPG returned to profitability with a net profit of RM1.8m, against a core net loss of RM114.8m in 1HFY24. Turnaround was mainly driven by better volumes and improved margins from nitrile glove sales, with US customers front-loading their orders ahead of the 50% tariff hike.
Outlook. We foresee that the glove industry will remain challenging for the next two quarters, as most US customers have completed their frontloading activities. Additionally, Chinese manufacturers have started to capture market share in the non-US market, with pricing of USD 16-18/1000 pcs for nitrile gloves. Although certain non-US customers still favour latex-powdered and powder-free gloves, the relatively lower price of nitrile gloves at Chinese manufacturers' pricing has resulted in gradually preference towards nitrile gloves. Therefore, we anticipate TOPG’s blended utilisation rate may be impacted. Also, China’s manufacturers are circumventing tariffs by increasing ASEAN production, which could intensify global glove oversupply and pressure non-US markets.
Earnings Revision. Following the disappointing results, we trimmed FY25/FY26 earnings by 55%/56% as we stay cautious on earnings recovery prospects and uncertain industry outlook, while also introducing FY27 CNP at RM30.2m.
Valuation. We remain cautious on the TOPG’s outlook. The absence of a significant recovery in margins suggests that it is still struggling to pass on higher input costs. As such, we are adopting a conservative stance by factoring in earnings uncertainty risk, reducing our P/B multiple applied to TOPG's earnings from 1.7x to 1.3x. As a result, we trimmed our target price to RM0.92 (from RM1.25), based on a lower BVPS of RM0.70 (from RM0.73) and maintained a HOLD recommendation with no ESG premium/discount applied from TOPG's three-star ESG rating. A potential re-rating is in the cards, should we see more concrete in volumes and margin improvements.
Risk. Volatility in raw material prices and currency exchange rates will impact ASPs and margins.
Disclaimer
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Currency | Buy Rates (RM) | Sell Rates (RM) |
---|---|---|
USD | 4.420886 | 4.455517 |
EUR | 4.777422 | 4.786296 |
CNY | 0.609704 | 0.610870 |
HKD | 0.568233 | 0.572913 |
SGD | 3.295156 | 3.321155 |