Analysts on ‘Sell’ call: Top Glove 1st-ever quarterly loss since September 2015

by M JAY SHEILA / pic credit: topglove.com

AS EXPECTED, Top Glove Corp Bhd has been tagged a ‘Sell’ call at most research houses tracking the stock after reporting its first-ever quarterly loss since September 2015.

Even before the announcement of the latest financial quarter numbers, the stock was already a ‘Sell’ rating at Hong Leong Investment Bank Bhd (HLIB Research), BIMB Securities Sdn Bhd and Apex Securities Bhd, and an ‘Underperform’ and ‘Reduce’ calls at Kenanga Research and CGS-CIMB Securities Sdn Bhd (CGS-CIMB Research) respectively. MIDF Amanah Investment Bank Bhd (MIDF Research) today downgraded the stock from ‘Neutral’ to ‘Sell’.

For the fourth quarter ended Aug 31, 2022 (4Q22), Top Glove posted a net loss of RM52.59 million on the back of a turnover of RM990.1 million. For the full year, it posted a net profit of RM235.97 million with a turnover of RM5.57 billion. In the previous financial year (FY21), it posted a net profit of RM7.71 billion on the back of RM16.36 billion in turnover.

Top Glove MD Lim Cheong Guan said the strained financial performance came as the industry weathers an adjustment period, contending with the twin factors of oversupply coupled with excess stockpiling by customers during the pandemic.

He said these had led to a slowdown in orders, setting average selling prices (ASPs) on a downward trend, which has been aggravated as customers adopt a “wait and see” approach in anticipation of a further decline in ASPs. On this, Apex Securities said these factors have led to a slowdown in orders and a prolonged downward trend of glove ASP.

Kenanga Investment forecasts the industry to turn the corner from the second half of 2023 (2H23) which is more optimistic than 2024 based on demand and supply projections. It expects ASP to remain in the doldrums in 2H22, maintaining its ‘Underperform’ call with a target price (TP) reduced by 8% to 60 sen.

Apex Securities anticipated a challenging business environment and pointed out several factors such as the implementation of a new minimum wage and an increase in natural gas and electricity prices will continue to compress its margin. Besides, the natural gas tariff is expected to continue to trend upwards in the coming quarters.

Apex Securities said it understands the management is activating cost past through mechanism (increase ASP by 5%), but it deems this to be challenging due to stiff competition among the glove players. Apex Security has maintained its ‘Sell’ call with a lower TP of 63 sen from its previous RM1.10.

Moving forward, HLIB Research expects utilisation rates to remain low in the coming months, as glove buyers have yet to fully deplete their inventories in hand. Any potential price adjustments in the near future are also expected to be marginal, mainly to share part of the higher costs, rather than a positive signal of improving the operating environment.

HLIB Research has maintained its ‘Sell’ call with a TP on Top Glove is subsequently lowered to 54 sen from 83 sen.

BIMB Securities anticipates that Top Glove’s business prospects would remain uninspiring due to the inflationary environment that has significantly impacted the commodity market as well as an unfavourable supply and demand situation. It has maintained a ‘Sell’ call with a lower TP of 51 sen from RM1 previously.

CGS-CIMB Research noted that Top Glove has deferred a total of 31 billion new capacity that it intended to add by end-CY25F. It views this positively as it will alleviate pressure on Top Glove to sell its new capacity, on top of the positive impact on overall global glove supply-demand dynamics. It has maintained its ‘Reduce’ call with a TP lowered to 50 sen.

MIDF Research believed that the group has limited capacity to completely pass on the cost going forward by increasing the ASPs since the customer can simply switch to other glovemakers. The demand-supply dynamics are anticipated to continue in the near term as more countries enter endemic phases, which weaken demand. 

The research house has revised its TP of 54 sen, down from RM1.01, given the downward earnings adjustment.

At 3.25pm, Top Glove traded at 65 sen, with more than 170 million shares exchanging hands.