Maybank Securities analyst Wong Wei Sum has downgraded Top Glove to “sell” from “hold” with an unchanged target price of 80 sen (23 cents).
The downgrade comes despite Top Glove’s results for the 1QFY2024 ended Nov 30 coming within the analyst’s expectations.
During the quarter, Top Glove reported a narrower loss of RM57.7 million compared to the loss of RM168.2 million in the 1QFY2023.
Excluding the RM1.8 million PPE write-off, Top Glove reported a core net loss of RM55.9 million.
“This is within our expectation as we expect lower losses in 2HFY2024 due to improving sales volume,” says Wong. “The q-o-q decline in 1QFY2024 core net loss was driven by stronger sales volume +9% q-o-q and lower natural gas and admin costs, partially offsetting the impact of higher raw material costs and a lower average selling price or ASP (-8% q-o-q) in 1QFY2024. Utilisation was 34% in 1QFY2024.”
For FY2024, Wong still sees the company making a loss and expects it to see a turnaround in profitability only in FY2025. There are no changes to his earnings forecasts for FY2024, FY2025 and FY2026 either.
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That said, if the momentum in sales volume growth continues, the analyst sees that Top Glove may achieve profitability by 4QFY2024 instead. During the results call, Top Glove’s management indicated that it has seen a significant pickup in sales volume of 30% to 40% for orders from December 2023 to January 2024. This has led to an expected improvement in the utilisation rate to over 40%, compared to the 34% in 1QFY2024.
Other key takeaways from the call include cost savings from enhanced production efficiency due to a higher utilisation rate, which are expected to offset the increase in raw material costs and natural gas prices.
Top Glove’s management is also positive on its finances, noting that the surge in glove demand will allow it to have stronger bargaining power in pricing, should there be any increase in raw materials and, or natural gas prices.
The company also intends to resume its dividend payments once it becomes profitable.
Despite the positives, Wong believes that Top Glove’s share price has outpaced its fundamentals, trading at 91 sen, or 13% above his target price of 80 sen.
“While we appreciate Top Glove for its active cost management, improving sales outlook and projected turnaround by FY2025, the share price has outpaced fundamentals and is now 13% above our 80 sen target price (on 1.4x calendar year 2025 P/BV peg),” he says.
“Top Glove’s net gearing stood at 0.12x (including RM1.2 billion perpetual sukuk or debt securities with no fixed maturity date). Our target price for Top Glove is based on -0.75 standard deviation (s.d.) to mean (2021-2023),” he adds.
As at 11.58am, shares in Top Glove are trading 1 sen higher or 1.1% up at 92 sen on the Bursa. Top Glove’s shares are trading flat at 26.5 cents on the SGX.
