Demand-supply imbalance to continue weighing on Top Glove's prospects


KUALA LUMPUR: It could be some time before Top Glove Corp Bhd turns the corner on its recent dismal earnings performance, given forecasts of how long it would take before the glove sector's oversupply situation rights itself.

Expectations are that customers' inventories will remain high for the immediate future, leading to low manufacturer utilisation rates.

For its 2022 financial year, Top Glove's revenue dove 66% year-on-year (y-o-y) to RM5.57bil on the back of lower average selling prices and volume sales.

Ebitda meanwhile plunged 93% y-o-y to RM721.7mil. According to Kenanga Research, the sharp contraction in earnings could have been due to aggressive pricing to reduce inventory to boost cash flow and weaker economies of scale from lower production volume.

In its recent stock update, Kenanga struck a downbeat note on Top Glove's prospects, pouring cold water on the glove maker's view that the industry will manage a turnaround from the second half of 2023.

"In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% to 595b pieces (as more capacity planned during the pandemic years finally comes on-line) while the global demand for gloves resumes its organic growth of 15% annually (taking our cue from Margma’s projection of 10-15% growth in global glove demand yearly), resulting in the excess supply rising further to 150b pieces.

"Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness," it said in a report.

Over the immediate term, Kenanga said it forecasts global demand to ease 10% in 2022 to 387 billion pieces as more countries come out of the pandemic. In a hypothetical situation where manufacturers maximise capacity, this would result in an excess supply of 124 billion pieces.

Hong Leong Investment Bank (HLIB) Research meanwhile noted that Top Glove was also experiencing higher cost of sales, which impacted its recent earnings.

"While Top Glove has indicated its ability to pass on part of its cost increase to glove buyers (ASP +5% in Oct), we reckon that the Group is not entirely out of the woods yet, given the persistent demand-supply imbalance," it added.

"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 operating environment," it added.

It said Top Glove's utilisation rate fell to about 60% from 70% to 75% a year ago.

Following Top Glove's earnings announcement, both research houses maintained their "sell" recommendations on the stock, with Kenanga revising its target price lower to 60 sen and HLIB reducing its own to 54 sen.

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Top Glove , gloves , Kenanga , HLIB , Margma , oversupply

   

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