UOBKH Research said it has recalibrated its valuation multiples upwards.
PETALING JAYA: Top Glove Corp Bhd
is poised to benefit from the potential demand recovery from distributors’ accelerating restocking cycle, regional producers’ average selling price (ASP) upcycle and the potential deterioration of the US-China trade tensions, says UOB Kay Hian (UOBKH) Research.
The research house said in a report that there are visible signs of demand recovery, after three years of industry consolidation.
Following rounds of meetings with regional glove manufacturers, UOBKH Research noted “multiple imminent tailwinds that will materialise in the upcoming quarters.”
These tailwinds include intensifying demand from customers, margin expansion on better efficiency and supply rationalisation, ASP upcycle across major manufacturers and stabilising input costs.
Against the backdrop of the tailwinds, UOBKH Research said it has recalibrated its valuation multiples upwards.
“Top Glove still appeals as a laggard with its high beta and optimistic sector prospects,” said the research house, which maintained a “buy” call on the stock with a higher target price of RM1.45.
UOBKH Research also expects Top Glove to deliver sequentially stronger earnings in the fourth quarter of financial year 2024 (4Q24) to 4Q25, led mainly by demand recovery, improving margins amid cost efficiency and better capacity utilisation.
The group’s monthly sales volume has improved from around two billion pieces in December 2023 to 2.4 billion to 2.8 billion pieces in June to July 2024, pushing its current utilisation rate to about 50%.
While demand recovery is intact, UOBKH Research said Top Glove’s management has guided that current production capacity is able to address its increasing order book.
The management noted Top Glove has been restarting production lines in two to three factories that had been scaled back during the last four to five months, and is currently recommencing eight to 10 double former gloves production lines every month. This will bring its 2024 targeted production capacity to 63 billion pieces.
Meanwhile, Malaysian glove producers indicated that over the past three quarters, any ASP revision done was mainly to mirror a cost pass-through and have faced resistance from end-customers to a certain extent.
UOBKH Research also said the beginning of the ASP hike cycle marks the eclipse of a persistent price war in the past two years as the industry progressively reverses its earlier oversupply state.
Another positive factor is that the 25% tariff hike on China medical-grade gloves is set to solidify the Malaysian glove industry, including Top Glove’s market leader position, and allay earlier concerns on market share losses to China producers due to stiff competition.
“We do not rule out possibilities of further detrimental policies from the United States on China’s exports,” added the research house.
To note, nine out of 10 US Food and Drug Administration import alerts on glove products year to date are on China exporters.
“With a 25% tariff imposed on estimated China glove ASP of US$19 to US$20 per 1000 pieces by 2026 (current ASP: US$17), Malaysian glove makers are likely able to command ASPs of US$24 to US$25 per 1,000 pieces while maintaining an optimal utilisation rate of over 90%,” said UOBKH Research.
In another development, the research house said Top Glove’s Turnaround Plan (T6) is on track.
Top Glove recorded RM54mil in gains from land bank disposal in 3Q24, which was part of its Top Glove’s T6.
The plan entailed the disposal of RM300mil in non-core land bank, with RM250mil completed.
“Of the RM250mil, about RM200mil had been realised as of 3Q24, with another RM50mil will be further realised in 4Q24.
“We understand that the proceeds will be set aside for the group to partially retire its RM1.18bil sukuk loans, while the remaining will be refinanced later,” the research house noted.
