UOB Kay Hian analyst Philip Wong has lowered his target price on Top Glove from RM3.70 ($1.19) to RM3.06 after the company missed expectations in its 4QFY2021 results.
Top Glove’s 4QFY2021 core net profit came in at RM608 million, 70% lower q-o-q, and 53% lower y-o-y. This brought FY2021 earnings to RM8.05 billion. While the figure was 360% higher than the same period last year, Wong deems this as below the brokerage’s expectations, as well as that of the consensus.
To be sure, Top Glove’s earnings for FY2021 accounted for 96% of UOB Kay Hian’s estimates and 93% of consensus’ estimates for the full year.
The company’s management also indicated “softening average selling prices (ASPs)” ahead of his expectations.
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In 4QFY2021, revenue contracted by 49% q-o-q and 32% y-o-y to RM2.11 billion. This was attributed to blended ASP declining by 32% q-o-q, and the US$/RM rate gaining 1.8% q-o-q.
Furthermore, volume contracted 20% q-o-q due to the full impact of the temporary stoppage of sales to the US, disrupted production due to Covid-19 social distancing measures, and customers opting to hold out for lower ASPs before restocking.
Despite this, Wong notes that a recovery in volume growth should cushion any accelerated ASP decline. However, he brings forward his expectations of the market achieving equilibrium to end-1QFY2022 from 1HFY2022.
He points at the scale of the Covid-19 vaccination rollout, saying that it has eased demand while competition arising from China is "increasingly more prominent".
That said, Wong expects sales volume to recover significantly, following new guidelines to resume 100% of production once over 80% of the workforce is fully vaccinated; as well as the lifting of the US export sales ban.
Management expects US demand to fully recover to pre-export sales ban by December, but Wong expects the company’s margins to contract as ASPs fall faster than raw material costs decline against lower economies of scale.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin softened to 36.9%, or down 26.8%, against lower ASPs and economies of scale.
Going forward, margins are expected to normalise further against lower ASPs. However, they should be partially cushioned by improved economies of scale and the still down-trending raw material costs.
Furthermore, Wong notes that Top Glove’s outlook on capacity expansion has been scaled back to 162 billion pieces per annum by 2024, down from 205 billion in its previous guidance in 3QFY2021. This implies a 3-year capacity expansion CAGR of 17.4% for 2021-24.
Apart from that, management has indicated for ASPs to reach market equilibrium in early-2022. “This is well ahead of our previous expectation of mid-2022. Given the drastic deterioration in market demand-supply dynamics, we do not rule out further deferred capacity expansion by both Top Glove and its peers going forward,” Wong writes.
Separately, Top Glove is expected to resume its pursuit of its Hong Kong listing. In Oct 2020, Top Glove announced its intention to list in Hong Kong, but the deferment appears related to the previously unresolved withhold release order (WRO) by the US Customs and Border Protection.
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Now that the WRO has been lifted, Top Glove is expected to finally complete its Hong Kong listing. It previously looked to raise RM4.17 billion at RM5.25 per share with a 9.7% dilution, but with its lower current share price and capex requirement, it is not imperative for Top Glove to raise as much, Wong thinks.
As such, he cuts his FY2022-2023 earnings forecast for Top Glove by 10% and 17% respectively, due to deferred capacity expansion and more conservative ASP assumptions. Furthermore, he highlights that further deferred capacity and suboptimal utilisation rates could weigh on the earnings outlook ahead.
Shares of Top Glove closed at RM2.81 on Bursa and 91 cents on the SGX on Sept 20, with a FY2022 dividend yield of 5.8% and price to earnings ratio of 12.3.
