Back to pre-Covid-19 margins

■ 1QFY8/22 net profit of RM185m (-92.8% yoy) was short of expectations, due to lower-than-expected sales volume and sharper-than-expected dip in ASPs.
■ We forecast weaker qoq performance in the coming quarters due to declining ASPs and lower sales volume (more balanced supply-demand dynamics).
■ Downgrade to Reduce, with a lower TP of RM1.50 (19x CY23F P/E).

1QFY22 core net profit declined 92.8% yoy, below expectations

1QFY8/22 core net profit came in at RM185m (-92.8% yoy), after stripping out one-off gains of RM0.7m (disposal of debt securities). This was below expectations at 8.5% of our and 10.7% of Bloomberg consensus full-year estimates, which we attribute to lower-than- expected sales volume and sharper-than-expected decline in average selling prices (ASPs). TOPG declared an interim dividend of 1.2 sen/share (52% dividend payout), which was below expectations due to 1QFY22 net profit missing expectations.

Weak 1QFY22 on account of lower ASPs and slower sales volume

1QFY8/22 revenue declined to RM1.6bn (-25.1% qoq/-66.7% yoy), owing to lower sales volume (-0.4% qoq/-34% yoy) and decline in ASPs (-32% qoq/-50% yoy). Consequently, 1QFY22 EBITDA margin declined to 21.1% (-16.4% pts qoq/-49% pts yoy) while core net profit dipped to RM185m (-69.6% qoq/-92.8% yoy). The latter was aggravated by an increase in tax rate (+8.4% pts qoq/-0.5% pts yoy), owing to “Cukai Makmur”.

Expecting weaker qoq results ahead

We continue to expect TOPG to post weaker qoq results, mainly due to easing demand as the Covid-19 pandemic comes under control. This has led to weaker ASPs for gloves due to incoming new global glove supply and slower customer buying patterns. We also gather that customers are keeping inventory levels low in view of declining ASPs as well as well capacity coming onboard globally.

Awaiting HKEX approval for dual primary listing

TOPG has recently obtained shareholders’ approval for a dual primary listing on the Stock Exchange of Hong Kong (HKEX). The next step to seek approval from HKEX. Assuming the over-allotment option is exercised/not exercised, TOPG will issue up to 793.5m/690m new shares and raise RM2.3bn/RM2bn. The new shares will make up 8.4%/9.7% of its existing share base of 8.2bn. While the bulk of the fresh funds will be utilised for capex purposes (60%), we estimate dilution of FY22-24F EPS by 4.2-6.0%.

Downgrade to Reduce, with lower TP of RM1.50

We cut our FY22-24F EPS to account for a further decline in ASPs (US$27/US$26/US$26 from US$32/US$29/US$28 per 1k pieces previously). Accordingly, our TP falls to RM1.50 (19x CY23F P/E), in line with its 5-year mean, as we believe that current valuations (46% premium over its 5-year mean) have yet to account for further downside to its earnings while the operating environment remains weak.