Brokers' take: CGS-CIMB maintains 'add' on Top Glove but expects ASPs to fall in Q3

CGS-CIMB on Wednesday reiterated its "add" call on Top Glove with an unchanged target price of RM7.80 on observations of strong Q2 results boosted by higher average selling prices (ASPs), which it expects will fall in Q3.

Analyst Walter Aw noted that Top Glove's Q2 revenue had increased 12.8 per cent from the previous quarter, largely due to an ASP hike of between 14 and 30 per cent quarter on quarter. This more than offset the lower sales volume, which was a result of temporary stoppages due to an outbreak of Covid-19 cases.

Though a spike in demand for gloves during the pandemic led to higher ASPs, Mr Aw thinks that the price will eventually dip from Q3, "a given since Top Glove's ASPs are at a 25 to 35 per cent premium to its peers". However, he added that the decline would come gradually, given that consumption patterns remain high.

Further, the analyst noted that the company has been plagued by allegations of labour abuse of late and two of its US subsidiaries had been banned by the US Customs and Border Protection (CBP). As such, he believes that the group's earnings per share (EPS) in Q3 2022 would fall 49 per cent compared to the corresponding period a year ago.

Following Top Glove's recent rights issue of 1.5 billion new shares on its Hong Kong listing, EPS would be further diluted by 11.2 to 15.1 per cent between FY2021 and FY2023, said CGS-CIMB.

While a swift resolution to the CBP ban on the company's two subsidiaries and a higher-than-expected rise in glove ASPs could uplift the group's performance, the brokerage warned of downside risks in sharp sales volume declines, faster-than-expected vaccine rollouts and a sharp decline in ASPs for gloves.

On the Singapore bourse, Top Glove shares closed up 3 per cent at S$1.74 on Wednesday. On Bursa Malaysia, the counter closed up 2.5 per cent at RM5.32.