PETALING JAYA: Top Glove Corp Bhd
’s shares suffered a decline in an overall weak market as analysts cut earnings estimates for the glove maker after it reported results that were below expectations.
Its share price was down six sen to 64.5 sen yesterday.
In a report to clients, UOB Kay Hian Research said it was cutting its FY23-FY24 earnings for the company by 74% and 8% based on lower average selling price (ASP) assumptions.
“Top Glove’s 4Q22 core net loss of RM52.6mil lowered FY22 core profit to RM236mil. This was below our, and consensus’ expectations, with cumulative earnings accounting for 79% and 77% of our, and consensus’ full-year estimates respectively,” it said.
The research house said the negative deviation was due to lower-than-expected ASPs while demand-supply remains imbalanced and is not expected to reach equilibrium until the second half of 2023.
“Top Glove has temporarily halted the payment of dividends as it prioritises the preservation of cash. This is merely a safeguard as Top Glove’s balance sheet remains highly robust,” it added.
In the report, the research house said the company’s margins barely broke even at 0.6%, dropping 5.2 percentage points on a quarter-on-quarter (q-o-q) basis.
“The respective 12.5% and 5.4% q-o-q declines in latex and nitrile costs were unable to offset the lower ASPs, suboptimal utilisation rates (40% to 45%) and a full quarter of other higher cost, in particular, minimum wage and natural gas tariff.
“Apart from that, Top Glove wrote down its inventory value by RM56mil in 4Q22, and cumulatively by RM229mil over FY22.
“Consequently, 4Q22 fell into RM52.6mil of losses. While latex and nitrile costs continue to soften off tepid demand, natural gas is expected to increase by 29%, effective October. Given this backdrop, we expect further losses in the quarter ahead,” UOB Kay Hian said.
It said the industry’s utilisation rate of around 50% is unlikely to incentivise glove producers to expand capacity over the immediate term.
“Similarly, Top Glove does not intend to expand capacity over 2022-2023. The demand-supply equilibrium could be facilitated by natural organic demand growth but accelerated by industry consolidation.
“The latter could stem from the smaller glove producers and new entrants that have now fallen into losses. Top Glove should well weather the downcycle in the industry,” it said.
It noted the company’s balance sheet was “robust”, with a net cash position of RM551mil (RM0.07 per share) and a gearing position of 0.06 times.
UOB Kay Hian has maintained a “hold” call on the stock but with a lower target price of 76 sen from an earlier 95 sen.
Similiarly, Kenanga Research has cut its FY23 forecast net profit for Top Glove by 33% and reduced its target price for its stock by 8% on lower ASP assumptions.
“We also introduce FY24 numbers into our earnings model.
“We rationalise our valuation basis to asset-based (from earnings-based previously) as we believe its earnings will remain depressed at least over the next 12 to 18 months.
“We reduce our target price by 8% to 60 sen, at a 50% discount to the sector’s average of 1.7 times during the last downturns in 2008-2011 and 2014-2015, as we believe the current downturn could be one of the deepest ever,” Kenanga said in its report.
