Profitability within Top Glove’s grip

AS anticipation builds for Top Glove Corp Bhd’s eventual return to profitability, several factors may influence its journey back to the black.

A turbulent financial year 2023 (FY23 ended Aug 31) after the normalisation of a pandemic-induced extraordinary demand surge saw the world’s largest rubber glove maker booking its first full year financial net loss in its history.

Although FY24 still sees Top Glove in the red, the group has drastically reduced its net loss by some 93% year-on-year (y-o-y) to RM61.8mil.

Another positive sign comes from its financials, which show gradual improvement over the course of FY24, nearing breakeven in the most recent reported fourth quarter.

The group booked a net loss of RM3.6mil for the quarter, a marked improvement from the same quarter a year ago, as revenue rose by some 75% y-o-y.

In recent months, some shareholders have also accumulated its shares, including substantial stakeholders such as the Retirement Fund Inc (KWAP), which holds an effective stake of slightly over 7% at the time of writing.

An eventual return to profitability could support a further recovery in its share price.

However, the question remains whether this anticipated turnaround is already priced in.

UOB Kay Hian (UOBKH) Research, which maintains its “buy” call on the counter, has forecast a net profit of RM352mil on the back of RM5.11bil revenue for FY25.

“We recalibrated our FY25-FY26 earnings downwards by 11% and 3%, respectively, as we revised our input costs forecasts to factor in higher minimum wages and latex prices,” UOBKH Research says.

Maybank Investment Bank (Maybank IB) Research, which downgraded its recommendation to a “hold” from a “buy” in its Oct 11 report, has a core net profit forecast of RM124mil on the back of projected revenue of RM4.49bil.

Maybank IB Research says FY25 and FY26 net profit forecasts were cut by 13% and 38% respectively, citing the actual FY24 results, a potentially stronger ringgit, higher average selling prices (ASPs) moving forward, and rising nitrile latex prices.

Top Glove is trading at 23.6 and 66.5 times its FY25 forecast price-to-earnings ratio, according to UOBKH Research and MaybankIB Research, respectively.Several factors influence the competitive environment in the glove industry, which is still seen as highly competitive with seemingly low barriers to entry.

These barriers appeared reduced during the Covid-19 pandemic, which attracted numerous companies from unrelated industries into glove manufacturing.The industry subsequently faced an oversupply situation as demand normalised post- pandemic.

Glove manufacturers, including Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, and Supermax Corp Bhd, ramped up production to meet the extraordinary surge in demand.

However, this led to a glut once the health emergency eased.

During the pandemic, the glove-making industry was perceived as pandemic-proof amid widespread business closures, bankruptcies and job losses in other sectors. High expectations that the world would need personal protective equipment, including gloves, indefinitely led to significant capital expenditure and production expansion.

Evidence of this is Top Glove, which, while it continued to operate with solid balance sheets to this day, chose to reinvest some of its extra gains into repurchasing its own shares.

As the health crisis eased, oversupply was exacerbated by cheaper, high-production volumes from China. Chinese manufacturers benefited from lower production costs, such as using coal compared to the pricier gas used by Malaysian factories.

Although Top Glove may not be able to compete with China-based glove makers in terms of price, it appears that the group, along with Malaysia’s main producers, can still capitalise on growing the environmental, social and governance awareness, especially in the West, as Malaysian manufacturers predominantly use gas instead of coal to fire up their plants.

Western importers may also favour Malaysia’s rubber gloves if further trade restrictions are imposed on China, though the exact impact will only become clear after the new Trump administration takes office.

Today, the outlook appears more optimistic.

Top Glove executive chairman Tan Sri Lim Wee Chai emphasises the importance of closely monitoring industry capacity to avoid future oversupply.

He states that Top Glove will plan strategically with sound market foresight, aiming to remain agile and adaptive to market changes.

The strong rebound of the ringgit in the third quarter has also allowed players, including Top Glove, to increase average selling prices.

The group notes recovering glove demand and has restarted advanced production lines at its newer factories that were temporarily halted during the oversupply.

Top Glove now operates 784 production lines across 47 factories – 41 in Malaysia, five in Thailand and one in Vietnam –with an annual production capacity of 95 billion pieces.

Looking ahead, the industry is focused on gaining market share amid growing awareness of sustainability issues, especially in Europe, with the European Union Deforestation Regulation coming into effect soon.

Apart from that, any further gains from the US-China trade tensions are still in question, as these could escalate further once president-elect Donald Trump is installed on Jan 20.

Nonetheless, the group has noted exponential sales growth to the United States in recent weeks, spurred by the impending tariff increase for Chinese medical gloves from the current 7.5% to 50% in January 2025, and to 100% by January 2026.