Date: 3 October 2024
Broker Name: UOB Kay Hian
Top Glove is the world’s largest glove manufacturer. Despite short-term headwinds, the company remains optimistic about its medium-term prospects, particularly due to the recovery in the operating matrixes from the restocking cycle and the US tariff hikes on China medical gloves.
Potential Forex Headwinds
Top Glove’s sales are mainly denominated in US dollars. The recent strengthening of the Malaysian ringgit against the US dollar (12.1% since 3QFY24) is expected to weaken the group’s earnings over the next two quarters (4QFY24-1QFY25). However, Top Glove has a natural hedge as 45-50% of its production costs, including raw materials and chemicals, are also in US dollars. The company is expected to pass through some costs to customers via higher average selling prices (ASP). The drastic forex movement is likely to impact net profit by 8-10% in the next two quarters.
Beyond Near-term Weaknesses
Top Glove’s long-term outlook remains strong. Since the depletion of distributors’ excess inventory in 2H23, the industry has seen continuous improvement in sales volume, utilisation rates, ASP, and margins. These metrics are expected to further improve due to the revised US tariffs on China’s medical gloves, which are set to catalyze a shift in demand to Malaysian glove makers. Top Glove anticipates a meaningful earnings recovery in 2025-26.
Revised US Tariffs on China Medical Gloves
The first phase of the revised US tariffs will commence in early 2025. US distributors are expected to stop importing medical gloves from China by November 2024. Top Glove has received inquiries and orders from large-scale US distributors. The company plans to raise the ASP of its nitrile gloves for US export by US$1-2 per 1,000 pieces starting in November 2024 and aims to return to pre-pandemic ASP levels of US$23 per 1,000 pieces by 2025.
Sales Recovery and Utilisation Rates
Top Glove’s monthly sales volume improved to 2.4-2.8 billion pieces in June-August 2024, increasing the utilisation rate to about 50% in 3QFY24 from 39% in 2QFY24. The company expects sales to improve further, estimating a volume of 3.5 billion pieces per month in September-October 2024, with a utilisation rate of 66-70%. The stabilisation of raw material prices is expected to contribute to earnings improvement in the coming quarters.
T6 Turnaround Plan
Top Glove has also been implementing its T6 Turnaround Plan, which involves the disposal of RM300 million worth of non-core landbank. RM250 million has been completed, with RM200 million realized by 3QFY24. The proceeds will be used to partially retire the company’s RM1.18 billion sukuk loans.
Labour Requirements and Capacity
Top Glove’s current active capacity is approximately 64 billion pieces annually. The company has restarted production lines in 3-4 factories that were previously scaled back and is recruiting around 200 workers per month. The goal is to increase production capacity to about 75 billion pieces by 2025, which will require hiring an additional 1,100 workers.
Financial Forecasts
The company maintains a BUY recommendation with a target price of RM1.45, implying a 27x PE for 2025F. Key financial metrics include:
- FY24F revenue of RM3,226 million, growing to RM5,686 million by FY26F.
- ASP growth is expected to be 5% in FY24F and 24% in FY25F.
- EBITDA margins are projected to improve from 4.1% in FY24F to 20.0% in FY25F.
- PAT is forecasted at RM410 million in FY25F, a significant turnaround from the loss of RM175 million in FY24F.
ESG Initiatives
Top Glove has committed to significant environmental and social goals:
- Reducing electricity and natural gas consumption intensity by 26% and 25%, respectively, by 2025.
- Ensuring compliance with International Labour Organisation (ILO) forced labor indicators, verified by third-party consultants.
- Promoting gender diversity, with 42% of its board of directors being female.
This report reflects the financial outlook and operational updates for Top Glove, suggesting a positive outlook in the medium term despite short-term currency-related challenges.
