Top Glove FY25Q1 result (RHB’s take)

• FY25Q1 core net loss of RM21.9 mln was wider than RHB’s expected core net loss of RM5 mln largely due to timing mismatch between cost and average selling price (“ASP”). Realized ASP fell 2% QoQ to US$19.3 whereas sales volume spiked by 16% QoQ (+104% YoY) to 10.4 bln pieces mainly driven by strong growth in the US. Raw material prices were mixed, with natural latex at +4% QoQ offset by a 3% QoQ decline in nitrile butadiene rubber (“NBR”) prices. Plant utilization rate improved 7 percentage points QoQ to 66%, which resulted in the core net loss narrowing
• Top Glove undertook a price adjustment towards the latter part of FY25Q1 as it will begin passing on the effect of the weakening US$ to customers. The effect of ASP increase (US$1 – US$2) particularly in the US market, will be more pronounced in FY25Q2 due to the time lag effect. The pricing structure of the 5-yr senior Sukuk Wakalah will be concluded by January 2025. Correspondingly, Top Glove will utilize RM800 mln (out of RM3 bln of the Sukuk) together with RM380 mln internal cash to fund the redemption of the perpetual Sukuk (which is set to expire by February 2025)
• RHB is of the view that the global trade reshuffling has already taken place, with the latest shipment from China to US expected to conclude by mid-November 2024 (given the required shipping period before the US import tariff kicks-in). While RHB maintains its overall demand growth assumptions in CY25 (+10%), RHB expects sales volume to taper off in CY25Q1 as RHB believes there was evidence of potential frontloading orders from US customers in CY24Q4. RHB thinks Malaysia will not be able to reap the full advantage of the import tariff imposed on China’s manufacturers as efforts to raise prices beyond US$24 remain challenging given the pushback from US customers. Meanwhile, future price adjustment merely reflected the effect of the weakening US$ that incurred in the previous quarter rather than taking advantage from higher tariff. This in turn may lead to ASP-cost spread disparity persisting (currently versus pre-Covid-19), which may prolong the sector’s earnings recovery
• Post result, RHB lowered its FY25 – FY27 earnings estimates to -RM13 mln, RM35 mln and RM199 mln (from -RM5 mln, RM44 mln and RM264 mln) after RHB incorporated higher raw material prices and housekeeping for other operating metrics
• RHB downgraded Top Glove to Sell with lower TP of RM1.10 (from RM1.28) as its core net loss of RM21.9 mln in FY25Q1 was below RHB and consensus’ expectations due to mismatch between cost and ASP while valuation is running ahead of earnings