Brokers’ take: Analysts positive on Top Glove, but mixed on whether the worst is over

ANALYSTS have raised their target prices on Top Glove Corporation : BVA 0% but are mixed on whether the worst is over for the world’s biggest glove maker.

UOB Kay Hian on Friday (Mar 17) raised its recommendation on Top Glove to “buy” from “hold”. It also raised its target price on the counter to RM0.95 from RM0.74, implying a potential upside of 7.3 per cent from Top Glove’s trading price of RM0.885 as at 4.20 pm. Its Bursa-listed shares were trading 6 per cent higher at the time.

The research team switched its valuation method to price-to-earnings (PE) from price-to-book (PB) to account for Top Glove’s losses in FY2023. After rolling over its valuations to a profitable 2024, it views using the PE valuation method as more appropriate.

Meanwhile, CGS-CIMB upgraded Top Glove to “hold” from “reduce” and nearly doubled its target price to RM0.82 from RM0.46, after switching its valuation methodology to PB from PE. The new target price implies a potential downside of 7.3 per cent.

Unlike UOBKH, CGS-CIMB believes a PE methodology would not be able to reflect Top Glove’s value as the group is expected to report quarterly losses of up to Q2 2024 due to the weak operating climate in the glove sector.

That said, both UOBKH and CGS-CIMB believe the worst is over for Top Glove and expect gradual increases in average selling prices (ASP) and sales volume moving forward. Valuations have also become attractive, and the reward-to-risk ratio is now more favourable.

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In contrast, Maybank reiterated “sell” on the counter but raised its target price to RM0.57 from RM0.35, implying a potential downside of 35.6 per cent. It only expects Top Glove’s financial performance to turn around in FY2025.

The research team now projects FY2023 net loss to widen to RM507 million and continue into FY2024 with a loss of RM154 million. This was after accounting for lower average plant utilisation rates and higher blended ASP assumptions.

For all three research houses, Top Glove’s recent earnings had disappointed. On Thursday, the group posted a net loss of RM164.7 million (S$49.3 million) for the second quarter ended Feb 28, 2023, compared with a net profit in the year-ago period. Revenue fell 58 per cent to RM618 million.

This came as the group grapples with an ongoing glove oversupply situation, a softer order book and rising production costs.

UOBKH believes this is the bottom for operating margins, as Top Glove has raised its ASPs significantly heading into the third quarter of FY2023. While it echoes the sentiment, CGS-CIMB’s research team does not think the quantum of ASP hikes at this junction is sufficient to pass on higher input costs.

“Also, we caution that current global demand for gloves remains subpar, as we estimate Top Glove’s utilisation rate to be in the region of 35-40 per cent in H2 2023, and expect only a slight improvement,” said CGS-CIMB Walter Aw.

Maybank noted that plant utilisation rate remained low at 32 per cent in Q2 due to stiff competition globally, especially from China.