Tough times remain ahead
FY8/22 core net profit of RM465m (-94.1%) beat estimates, as we consider recently revealed RM229m inventory write-down for FY22 as non-core item.
We expect TOPG to post a 90% yoy decline in FY23F core net profit, owing to our view of sustained weakness in both ASPs and sales volume.
TP is lowered to RM0.50 (22x CY24F P/E). Reiterate Reduce.
FY8/22 core net profit declined 94.1% yoy; beat expectations
4QFY8/22 core net profit came in at RM3.4m (-99.4% yoy), excluding losses of RM56m (inventory write-down to net realisable value). This brought FY8/22 core net profit to RM465m (-94.1% yoy); above expectations, ahead by 155% of our and 153% of Bloomberg consensus’ FY22 estimates). Earnings beat was due to a surprise new revelation by TOPG that it had conducted an inventory write-down of RM229m in FY22 (9MFY22:RM173m). No dividend was declared in the quarter; within expectations.
4QFY8/22: Weak ASPs and sales volume remain the theme
Qoq, 4QFY8/22 revenue and core net profit waned 32.4% and 95.3%, respectively. This was due to a further worsening of the supply glut in the global glove sector, leading to: i) a decline in sales volume (-35% qoq), ii) lower ASPs (-5.4% qoq) and iii) weaker economies of scale. Also, TOPG incurred margin compression (EBITDA margins: -2.6% pts qoq) from higher operating costs, i.e. hikes in both minimum wage (+25% yoy) and natural gas costs.
Expecting a 90% yoy drop in FY23F core net profit
Heading into FY23F, we expect TOPG to post a 90% yoy dip in core net profit, assuming ASPs of US$19/1k pieces (-28.5% yoy) and utilisation rate of 50% (FY22: 50%). Note that, we expect the supply glut in the global glove sector to only dissipate towards 2HFY23F. While TOPG intends to raise its ASPs by 5% in Oct 22 to pass on cost hikes, this is likely to be difficult in the near term given the current operating environment (industry utilisation rate remains low at 40-45%, while ASPs currently stand at US$18-20/1k pieces).
TOPG slowing capacity growth plans in view of market weakness
In view of the current weak operating environment, TOPG is deferring its capacity expansion plans in 2023F (current annual capacity of 100bn pieces). It is only expecting to grow its annual capacity by 4% (+4bn from current) in 2024F and 11% (+11bn from current) in 2025F. In total, it has deferred a total of 31bn new capacity that it intended to add by end-CY25F. We view this positively as it will alleviate pressure on TOPG to sell its new capacity, on top of the positive impact on overall global glove supply-demand dynamics.
TP lowered to RM0.50; Reiterate Reduce
We lower our FY23-24F EPS by 60-86.5% to account for lower-than-expected sales volume and weaker ASPs. Accordingly, our TP is lowered to RM0.50 (22x CY24F P/E, inline with its 10-year historical mean). We keep our Reduce call as current valuations (+2 s.d. of its 5-year mean) have yet to fully account for its weak near-term earnings prospects (3-year core net profit CAGR of -14.8% in FY22-25F).