UOB Kay Hian analyst Philip Wong has upgraded Top Glove Corp BVA to “buy” with a higher target price of 95 sen from 74 sen previously on better business prospects.
For its 1HFY2023, Top Glove’s cumulative losses amounted to RM333 million ($99.73 million) — well below UOBKH and consensus expectations at RM256 million and RM322 million in cumulative losses. This is on the back of softer-than-expected margins.
However, Wong believes that this is the bottom for operating margins for the company, noting that Top Glove has raised average selling prices (ASPs) significantly heading into 3QFY2023.
“Top Glove indicated that ASPs were close to US$17 per1,000 pieces for the quarter. Moving forward, ASPs have been raised to US$21 per 1,000 pieces from February onwards to pass through higher costs. Notably, this is alongside China glove producers that have raised their ASPs to US$17 per 1,000 pieces from US$14 per 1,000 pieces,” says Wong.
For its 2QFY2023, Top Glove recorded ebitda margin softening of -12.8% from -11.4% q-o-q. This was primarily due to softer ASPs as well as higher natural gas and electricity tariff rates.
In his outlook, Wong highlights that input costs such as nitrile and latex are expected to increase due to higher feedstock and the wintering season respectively. Meanwhile, Top Glove’s 3QFY2023 should realise lower natural gas tariff of 15% in April onwards, he adds.
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Coupled with increased ASPs, 3QFY2023 could still realise losses — it should, however, be significantly minimised.
“While severe underutilisation continues to permeate the industry, the identifying of Top Glove’s bottoming of earnings should significantly improve sentiment. We recognise that utilisation rates and margins are unlikely to recover to pre-pandemic levels anytime soon, but by sheer earnings recovery and the selldown over the past year and a half, valuations have turned attractive,” says Wong.
UOBKH cuts its FY2023 earnings estimate to -RM373 million from -RM256 million respectively, while leaving its FY2024 and FY2024 earnings estimate unchanged.
The analyst’s target price of 95 cents is based on 29x P/E or 1.5 standard deviation of Top Glove’s pre-pandemic five-year mean based on FY2024’s earnings.
This represents a switch from UOBKH’s previous valuation methodology which was based on a P/B peg of 0.91x to account for Top Glove’s losses in FY2023. Now that the firm has rolled over its valuations to a profitable 2024, the PE valuation method is more suitable, says Wong. This is in part to capture the further earnings recovery heading into F20Y25.
Based on Top Glove’s pre-pandemic five-year mean of 20x peg to FY2025’s earnings, a target price of RM1.10 is derived, he adds.
As at 1.48pm, shares in Top Glove are trading at 24 cents on the Singapore Exchange and 86 sen on Bursa Malaysia.
