Date: October 11, 2024
Broker: Maybank Investment Bank Berhad
Company Overview
Top Glove is the world’s largest glove manufacturer, with a balanced product mix of latex/nitrile examination gloves and non-examination gloves. The company’s market capitalization stands at MYR 8.5 billion (USD 2.0 billion). Key stakeholders include LIM WEE CHAI, holding 27.2% of shares, Kumpulan Wang Persaraan at 7%, and Firstway United Corp. at 6.8%.
Financial Performance: 4QFY24 Results
4QFY24 Core Net Loss
Top Glove’s 4QFY24 core net loss widened to MYR 26.2 million, from MYR 88 million in 4QFY23 and MYR 29 million in 3QFY24. This was below expectations due to higher costs associated with test-running new and idle production lines. For FY24, the company reported a cumulative core net loss of MYR 181.6 million, a 31% higher loss than initially forecast.
Sales Performance and Margins
4QFY24 saw a significant 31% quarter-on-quarter (QoQ) increase in sales volume, while the average selling price (ASP) rose by 3%, reaching around USD 20 per 1,000 pieces. However, EBITDA margins dropped to 9% (from 20% in 3QFY24) due to higher operating costs.
Key Operational Highlights
Plant Utilization and Capacity Expansion
Top Glove’s plant utilization rate improved to 60% in 4QFY24 from 50% in the previous quarter, with further improvements expected in the coming quarters. The company is reopening idle plants and plans to increase its effective production capacity to 64 billion pieces per year by December 2024. Current plant utilization rates are around 70%.
Future Outlook: FY25 Profitability Target
Top Glove aims to achieve profitability by FY25, backed by increasing ASPs, expected to rise further from November 2024 due to currency impacts. The company is also anticipating stronger sales driven by U.S. orders being diverted to Malaysian manufacturers due to upcoming higher tariffs on Chinese-made gloves starting in 2025.
Earnings Forecast Revisions and Valuation
Earnings Downgrades
Maybank Investment Bank downgraded Top Glove’s FY25 and FY26 net profit forecasts by 13% and 38%, respectively. This adjustment factors in FY24 actual results, a revised MYR/USD exchange rate of 4.40 (from 4.55), and a higher ASP of USD 21 for FY25/26E (previously USD 19.5). The company also factored in a nitrile latex price increase to USD 0.90/kg from USD 0.80/kg.
Share Price Target
Top Glove’s 12-month price target was revised to MYR 1.08, down from MYR 1.10, with a HOLD rating based on the limited upside potential.
Bonus Issue Proposal
Top Glove has proposed a 1-for-20 bonus issue of up to 406 million warrants. The exercise price will be determined later.
Risk Factors
- Chinese Competition: Aggressive capacity expansion and pricing strategies from Chinese competitors with lower energy and production costs pose a significant risk.
- Raw Material Prices: Spikes in raw material costs that cannot be fully passed on to customers.
- Prolonged Oversupply: Continued oversupply in the market could impact pricing and profitability.
- Forex Impact: Further strengthening of the MYR against USD could exacerbate foreign exchange losses.
- Idle Factories: Potential for further impairment on the company’s idle production facilities.
Conclusion
Despite a challenging FY24, marked by significant losses, Top Glove expects a turnaround in FY25 driven by capacity expansion, rising ASPs, and increasing demand. However, the company faces ongoing risks from competitive pressures, raw material price volatility, and forex fluctuations.
