Felicia Tan Fri, Jun 10, 2022
CGS-CIMB Research analyst Walter Aw is keeping his “reduce” recommendation on Top Glove with a lower target price of RM1 (31.39 cents) from RM1.30 previously after the glove manufacturer posted record-low quarterly profits for the 9MFY2022 ended May.
For the period, Top Glove’s core net profit fell by 96.1% y-o-y to RM287.3 million, below expectations at 63% of Aw’s full-year estimates.
The company’s core net profit for the 3QFY2022, which fell 99.2% y-o-y to RM15.3 million, also stood lower than Aw’s expectations.
The lower figures were due to the decline in average selling prices (ASPs), higher costs and weaker-than-expected q-o-q growth in sales volume.
3QFY22 EBITDA margins also slipped 4.6 percentage points q-o-q to 8.6%, as a result of margin compression with lower ASPs despite higher input costs.
Looking ahead, Aw expects to see ASPs bottoming out for Top Glove in the 4QFY2022.
“We expect a 5% q-o-q decline at US$22 ($30.38) per 1,000 pieces,” he writes. “Yet, we believe this does not indicate that sector supply-demand dynamics improved as customers are keeping low inventory levels (slower buying patterns) while new capacity is still aggressively added in the sector. We believe this is due to recent cost hikes, and expect lower margins in near-term despite a pick-up in sales going forward.”
In addition to his lower target price, Aw has lowered his earnings per share (EPS) forecasts for the FY2022 to FY2024 to account for lower sales volume and ASP declines.
“In our view, the worst is not over for Top Glove as we believe current valuations (77% premium to 5-year mean) have yet to account for further downside to its earnings, while the operating environment remains weak,” he writes.
As at 12.22pm, shares in Top Glove are trading at 36.5 cents on SGX and RM1.16 on Malaysia’s Bursa.