Brokers' take: UOBKH downgrades Top Glove to 'hold' after Q3 earnings miss

UOB Kay Hian (UOBKH) has downgraded its call on Top Glove to "hold" from "buy" with a lower RM5.15 target price from RM6.30 previously, against the backdrop of rationalised earnings and lower severe Covid-19 cases in the glove maker's key markets.

This comes after Top Glove on Wednesday reported a net profit of RM2.04 billion for the third quarter ended May 31, 2021, which came in below UOBKH's expectations.

In a Thursday report, analyst Philip Wong attributed the earnings miss to US Customs and Border Protection (CPB) requirements that weighed on the group's volume sales, resulting in average selling prices (ASPs) normalising.

"Recall that volume sales had already contracted in Q2 FY2021, which was already derailed by an outbreak of Covid-19 that temporarily affected production. Heading into Q4 FY2021, nitrile ASPs could be lower by 20-30 per cent quarter on quarter, or 5-10 per cent lower on a month-on-month basis," he said.

Noting that a sentiment overhang remains for Top Glove given the US CPB's withhold release order (WRO) against Top Glove's products, Mr Wong expects the group to see volume growth ahead - albeit at an expense of its ASPs, given that key geographic regions which typically command premium ASPs are now curtailing demand.

On the back of his more conservative ASP assumptions, the analyst has cut his FY2021, FY2022 and FY2023 earnings estimates respectively by 20 per cent, 10 per cent and 10 per cent.

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"We expect normalising ASPs and earnings from its peak alongside lower Covid-19 cases to weigh on (Top Glove's) outlook. That said, Top Glove's valuations are supported by its generous and attractive dividend yields of 14.8 per cent, 6.7 per cent and 2.9 per cent for FY2021, FY2022 and FY2023 respectively," he added.

Likewise, Maybank Kim Eng (Maybank KE) has lowered its earnings forecasts for the group from FY2021 to FY2023 after trimming its ASP assumptions to -8 per cent.

The brokerage maintains its "hold" call on Top Glove while lowering its price target to RM4.51 from RM4.85 following adjustments to its earnings estimates.

Its analyst Wong Wei Sum observed that the group's ASPs had been falling from their peak in February 2021 to decline 16 per cent quarter on quarter in Q3, while lead time has been reduced to 90-120 days.

His downward ASP revisions have been partially cushioned by a lower number of shares to be issued for Top Glove's Hong Kong listing, which has been delayed considering the WRO.

"Top Glove expects sales volume to pick up by 10-15 per cent in Q4 FY2021 once the US CBP lifts its WRO against Top Glove's products, while ASP may weaken further in the coming months on rising competition," he noted in a separate report on Thursday.

Shares of Top Glove were unchanged at S$1.60 as at the midday trading break on Thursday.