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TOPGLOV (7113) TOP GLOVE CORP BHD drops as analysts hold contrasting views on US import ban lift

KUALA LUMPUR (Sept 13): Top Glove Corp Bhd’s share price drifted lower this morning on a rather thin trading volume despite the lifting of the import ban on the group's products by the US Customs and Border Protection (CBP).

The stock fell 11 sen, or 3.21%, to RM3.32 -- the lowest level since May last year -- although it opened higher at RM3.47. Trading volume stood at 10.7 million shares as at 10.40am.

Among investment analysts, who track the glove manufacturer, some have reiterated their positive views as the uncertainty on the US export looming over Top Glove for a year has been removed now. However, others took the opportunity to slash target prices further to below RM3 in view of the current less favourable operating landscape.

The import ban lift is welcome news considering that the US accounts for more than 90% of sales to the North American market, said Kenanga Research. The US market accounts for 18% to 21% of Top Glove's export sales.

"In our view, the current share price level reflects an overly bearish reaction to expected decline in average selling price (ASP) in coming quarters ahead," Kenanga Research wrote in its latest review, while noting Top Glove has scaled down new capacity expansion by 14% which it sees as a positive move.

Kenanga reiterated its "outperform" call on Top Glove. However, it trimmed its target price to RM5.40 from RM5.60 as it reduced its earnings forecasts amid expectations of thinner EBITDA margin and sales volume.

Kenanga Research also expected Top Glove to post a record high net profit of RM8.58 billion in FY21, RM3.02 billion in FY22 and RM2.23 billion in FY23.

In contrast, KAF Equity Sdn Bhd cut its target price to RM2.34 from RM4.70 despite the good news from the US.

“Management (of Top Glove) expects it will take a minimum of three months for sales to the US to normalise. Even then, we reckon it may not recover to the level seen previously considering the current market condition,” KAF Equity commented.

It highlighted that various headwinds are blowing hard at Top Glove. One is the weak demand for its nitrile gloves which resulted in “worse than expected drop in ASP and lead time”.

“Furthermore, we expect operating leverage to reverse drastically as raw material price adjustment normally lags the ASP trend. In view of these, we believe that there is more downside to the share price even at the current low valuation,” said KAF Equity

It expected Top Glove to achieve an annual profit of RM7.93 billion in the financial year ended Aug 31, 2021 (FY21). However, KAF Equity anticipates sharp contractions in the following two financial years. Its profit forecast is at RM1.079 billion in FY22 and RM802.7 million in FY23.

Meanwhile, AmInvestment Bank maintains its “hold” call on Top Glove, but raised its target price slightly to RM3.77 to RM3.66.

"The news could boost Top Glove's share price as it may potentially improve the ESG perception toward the company," AmInvestment Bank wrote in the latest research note.

It has also upgraded the ESG rating of Top Glove to "3 stars" from "2 stars".

Meanwhile, AmInvestment Bank noted that the ASP will continue to decline in the second half of 2021 due to a higher incoming supply of gloves in the near term. "As a result, the positive impact from the removal of the CBP ban is offset by lower earnings in FY22 and FY23.

AmInvestment Bank's current earnings estimates are RM8.54 billion for FY21, RM2.80 billion for FY22 and RM1.51 billion for FY23.


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