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No more supernormal profits by TOPGLOV (7113) TOP GLOVE CORP BHD?

Analysts attending Top Glove’s first quarter results briefing late last week came out expecting huge earnings drop for the year ending August 31 2022 (FY22) and 2023.

KUALA LUMPUR: The days of supernormal profits by Top Glove Corp Bhd seem over.

Analysts attending Top Glove's first quarter results briefing late last week came out expecting huge earnings drop for the year ending August 31 2022 (FY22) and 2023.

They also downgraded the counter as its outlook remained challenging over the near term amid the decline of average selling price and rising competition from Chinese rubber glove manufacturers.

Top Glove shares slumped to its sixth day of losses, closing 6.94 per cent or 15 sen lower at RM2.01 for a market capitalisation of RM16.5 billion. Over the past five days, the stock had lost more than 16 per cent.

Kenanga Research expects a challenging period for Top Glove as it cut its FY22 net profit forecast by 55 per cent to RM925 million on revenue of RM8.87 billion.

Top Glove, the world's largest rubber glove company, posted a massive RM7.87 billion net profit on the back of RM16.4 billion revenue in FY21.

Kenanga Research analyst Raymond Choo Ping Khoon also lowered its target price from RM3.60 to RM2.05 based on 18 times of 2022 earnings per share at pre-Covid five-year forward historical mean.

"Post Covid-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness," he said in a report yesterday.

Hong Leong Investment Bank Bhd (HLIB) lowered its FY22 and FY23 forecasts by 39 per cent and 73 per cent respectively, while Affin Hwang Capital reduced its projections for FY22 and FY23 by 26 per cent and 62 per cent.

HLIB said this was on the likelihood of lower revenue assumption to account for the weaker glove prices and lower utilisation rate.

Top Glove's net profit plunged 92.2 per cent year-on-year (YoY) to RM185.72 million in Q1 ended November 30, 2021, from RM2.36 billion recorded in the same period previously.

This was mainly attributed to declining average selling prices (ASPs) and higher operating costs due to lower utilisation rates, according to the company's exchange filing last Friday.

Its Q1 revenue plummeted 66.8 per cent YoY to RM1.58 billion from RM4.76 billion due to decreased sales volume and normalised ASPs, following mass vaccine rollout on a global scale that had affected glove demand.

HLIB analyst Sophie Chua Siu Li said Top Glove's results came in below consensus estimates due to lower-than-expected revenue and diminishing operating leverage.

"The 24 per cent decline in revenue was mainly due to falling ASPs (-32 per cent) as sales volume was flat quarter-on-quarter (QoQ).

"The decline in nitrile glove sales volume (-14 per cent), was neutralised by higher sales volume for both latex (+7.0 per cent) and surgical gloves (+26 per cent), supported by increased buying interest from developing countries as well as the resumption of elective surgeries," she said in a report today.

Chua said earnings before depreciation and amortisation (ebitda) margins were compressed by 15.2 percentage points (ppts) QoQ, as the decline in ASP was much steeper than the decline in raw material prices.

HLIB said nitrile butadiene rubber (NBR) prices are expected to continue trending lower, due to additional incoming capacity and tapering demand of nitrile gloves.

Latex prices are also likely to increase in the coming months due to the La Niña phenomenon, followed by wintering period.

"ASPs are also expected to continue declining, by a lower quantum of 5.0 per cent month-on-month as glove prices have fallen closer to pre- Covid levels."

HLIB said nitrile glove ASP stood at US$25 to US$30 per 1,000 pieces compared to pre-pandemic level of about US$21.

"With ASPs inching closer to pre-pandemic levels, glove buyers are now more willing to gradually replenish their inventories.

HLIB lowered its target price for Top Glove from RM2.80 to RM1.56.

"We downgrade our recommendation on Top Glove to "Sell" with upside risks to our target price and rating includes surge in Omicron cases triggering a spike in glove volumes, sharp decline in raw material prices, and substantial depreciation of the ringgit against US dollar."

Affin Hwang, meanwhile, said its earnings forecast cut had factored in slower sales volume and delay in capacity expansion.

The firm also lowered its target price for Top Glove to RM1.85 from RM3.30 and downgraded its call from "Hold" to "Sell", despite margins remained above pre Covid-19 level.

Its analyst Ng Chi Hoong said the overall profit margin could remain commendable relative to pre-Covid-19 levels, as margin at 16 per cent was still higher than the average 10 per cent to 12 per cent achieved over FY17-FY19.

"There is still room for margin compression, but the decline is unlikely to be as severe as in the fourth quarter of FY21 and Q1 of FY22, given that price competition within the nitrile segment has started to ease," Ng added.


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