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CGS-CIMB lowers Top Glove's TP to 50 sen as it sees 'tough times' ahead

Felicia Tan
Felicia Tan9/21/2022 11:54 AM GMT+08  • 3 min read
CGS-CIMB lowers Top Glove's TP to 50 sen as it sees 'tough times' ahead
The glove maker saw a 96.9% y-o-y plunge in FY2022’s earnings of $73.1 million. Photo: Bloomberg
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CGS-CIMB Research analyst Walter Aw has retained his “reduce” call on Top Glove Corporation after the group posted its results for the 4QFY2022 and FY2022 ended August.

During the 4QFY2022, Top Glove reported a loss of RM52.6 million ($16.3 million), bringing its total earnings for the FY2022 to RM236.0 million, 96.9% lower y-o-y. The figures were due to the weak average selling prices (ASPs) and a decline in sales volume. Top Glove also incurred margin compression from higher operating costs such as hikes in both minimum wage and natural gas costs.

Core net profit for the 4QFY2022 fell by 99.4% y-o-y to RM3.4 million excluding losses of RM56 million (inventory write-down to net realisable value). The quarter’s core net profit contributed to the group’s FY2022 core net profit of RM465 million, down 94.1% y-o-y.

Despite the plunge in core net profit, FY2022’s figure stood above Aw’s expectations at 155% of his full-year estimates.

“[The] earnings beat was due to a surprise new revelation by Top Glove that it had conducted an inventory write-down of RM229 million in FY2022,” the analyst explains. “No dividend was declared in the quarter; within expectations.”

On this, the analyst has lowered his earnings per share (EPS) estimates for the FY2023 to FY2024 by 60%-86.5%.

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Accordingly, his target price is lowered to 50 sen from RM1 previously.

The retained “reduce” call also comes as current valuations at two standard deviations (s.d.) of Top Glove’s five-year mean have “yet to fully account for its weak near-term earnings prospects”, the analyst says.

FY2023 estimates

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Heading into the FY2023, Aw expects Top Glove’s core net profit to decline by 90% y-o-y, assuming that ASPs of US$19 ($26.77) per 1,000 pieces and a utilisation rate of 50%, same as that of FY2022’s.

He adds that the supply glut in the global glove sector is expected to only dissipate towards the 2HFY2023.

Furthermore, Top Glove’s intention to raise its ASPs to pass on cost hikes is likely to be difficult in the near term due to the current operating environment, the analyst points out.

On Top Glove’s decision to defer its capacity expansion plans in the FY2023, Aw is positive on the development as it will alleviate pressure on the group to sell its new capacity, on top of the positive impact on overall global glove supply-demand dynamics.

As at 11.53am, shares in Top Glove are trading at 20.5 cents on the SGX and 66 sen on the Malaysian Bursa.

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