End of good times for Top Glove?

KUALA LUMPUR June 13 - At the height of the pandemic, Top Glove Corp Berhad soared high into the sky.

Orders after orders swamped the firm from all over the world for it's rubber gloves as healthcare frontliners grappled to ward off the virus.

Top Glove was running high and it consolidated further it's position as the world's number one rubber glove producer.

The Klang-based company also broke convention to join the ranks of the prestigious  RM1 billion club and stand shoulder to shoulder with other high performing firms.

Demands dissipated?

As the saying goes, all good things must come to an end and Top Glove is of no exception.

With almost all Malaysians vaccinated, demand for rubber gloves at hospitals have dissipated.

The economy is recovering and the unemployment rate is going down.

The situation has returned to normal in the rest of the world with people flocking the stadiums and restaurants.

Due to these feel good factors, it looks like it is the end of good times for Top Glove as the world returns to pre-COVID days and businesses return to normalcy.

Analyst : challenging outlook for Top Glove

Analysts are not so enthusiastic on Top Glove's prospects and they paint a bleak future on the firm.

However, the good news for Top Glove Corp is that many impromptu or late-comer small-sized glove players who entered the marketplace at the height of the COVID-19 pandemic are diminishing.

Hong Leong Investment Bank Research said these small players are looking to exit the industry completely due to the intense competition and tough operating environment.

While this would help ease the oversupply situation slightly, the research house said more is needed from all major glove makers to normalise the current state of demand-supply mismatch.

“Top Glove has also indicated that it is not in a hurry to acquire more glove plants as it still has idle capacity to be filled currently,” said Hong Leong analyst Sophie Chua Siu Li.

According to Hong Leong Research, Top Glove’s nine month net profit to RM255.8 million is below analysts consensus.

Subsequently, the research house lowered its projections for Top Glove as much as 48 percent to better reflect the tough operating environment.

“Consequently, our target price for Top Glove is lowered to 82 sen and recommends that investors sell their Top Glove shares with a "sell" call.

“We think that the company face headwinds such as higher operating costs and utilisation rates are below pre-pandemic levels.

This will persist for a bit longer given that the demand-supply imbalance has yet to normalise.”

The research house expects Top Glove’s utilisation rate to still see small improvements on a quarter-on-quarter basis as its sales volume to the US continues to recover.

Meanwhile, CGS-CIMB Research retained its “reduce” rating on Top Glove but lowered the glove maker’s target price to RM1 to account for lower sales volume and average selling price (ASP) decline in tandem with its lowering of the company’s 2022-2024 forecasts.

“In our view, Top Glove’s ASP has likely bottomed out and we expect a 5 percent at US$22 for 1,000 pieces,” said analyst Walter Aw.

“Yet, we believe this does not indicate that sector supply-demand dynamics improved as customers are keeping low inventory levels (slower buying patterns) while new capacity is still aggressively added in the sector.”

“We believe this is due to recent cost hikes and expect lower margins in near-term despite a pick-up in sales going forward,” added CGS-CIMB Research.

TA Securities Research also maintained its “sell” call on Top Glove with a further reduction in its target price to 93 sen (from RM1.27 previously) as it expects the challenging operating environment to persist over the next two quarters with plant utilisation rates expected to hover at 50 percent-60 percent.

“Moving into the fourth quarter of 2022, we expect the ASP to decline by about 2 percent month-on-month,” projected analyst Tan Kong Jin.

“We gather that it is not as easy as before to pass through the cost increases due to the current oversupply situation. 

Positively, the management opined that margins would be flattish on a quarter on quarter basis due to the decrease in raw material prices.”

The way forward for Top Glove

Top Glove however has always been the darling of investors due to it's consistent earnings and dividend policy.

The company should keep up with it's good work in ensuring transparency and practise stellar corporate social governance.

Admittedly, this will be a storm in the teacup for the company until demand surges again due to a local or global calamity.

Until then, perhaps the cash-rich company could diversify to prepare for rainy days. - DagangNews.com