The pandemic may seem like a distant memory now, but it had the effect of boosting the fortunes of several sectors such as technology, rubber gloves, and personal protective equipment.
As countries around the world lifted movement restrictions and reopened their borders, demand also correspondingly plunged as people welcome some semblance of pre-pandemic normalcy.
Top Glove Corporation Berhad (SGX: BVA) is one such business.
The world’s largest glove manufacturer, which has a production capacity of 100 billion pieces per annum, saw its share price plunge from a high of S$3.10 in August 2020 to S$0.18 in September last year.
However, in the last week, the share price of Top Glove has jumped 21.4% from S$0.21 to close at S$0.255.
Could the glove maker be poised for a turnaround and see its share price head higher?
Weak earnings to persist in the near term
Last week, Top Glove released its fiscal 2023’s second quarter (2Q FY2023) earnings for the period ending 28 February 2023.
The glove maker saw its revenue plunge by 58.2% year on year from RM 1.48 billion to RM 618 million.
Operating expenses, however, fell by just 43.1% year on year to RM 785.8 million.
Top Glove ended up incurring an operating loss of RM 142.8 million and a net loss of RM 164.7 million.
On a quarter on quarter (qoq) basis, its numbers remained relatively flat.
Revenue dipped by 2% qoq from RM 633 million in 1Q FY2023 while net loss was 2% lower qoq.
The good news is that sales volume grew 6% qoq as customers showed signs of replenishing their inventories.
Top Glove continued to generate negative free cash flow for the first half of fiscal 2023 (1H FY2023).
The group reported a free cash outflow of RM 272.2 million for 1H FY2023, a sharp improvement over the free cash outflow of RM 571.3 million in the previous corresponding period.
The glove maker ended the period with RM 703.9 million of cash and investment securities along with RM 432.3 million of debt.
The average selling price continues to decline
Despite the rise in sales volume, the average selling price (ASP) continues to be under pressure.
The overall ASP slid by 4% qoq due to a combination of oversupply and intense competition.
Drilling into the details, nitrile gloves saw their ASP fall 1% qoq while natural rubber gloves suffered a 6% qoq drop in ASP.
Although customers are seeing their glove stockpiles diminishing, they are in no rush to place large orders, resulting in lower utilisation rates among manufacturers.
With more players in the market, as the pandemic saw the influx of new glove manufacturers, ASP will continue to be under pressure.
There is some good news though – Top Glove has raised its ASP effective February and the positive effect should flow through into 3Q FY2023.
With nitrile and natural rubber gloves making up 70% of the group’s product mix in 2Q FY2023, investors should hopefully see some positive impact on sales and margins in the next quarter.
A mixed picture for production costs
Top Glove is enjoying some respite from higher fuel prices caused by inflation.
Fuel costs take up 18% of its 2Q FY2023 production cost breakdown and natural gas tariffs are expected to decline by 15% come April 2023.
However, electricity tariffs will surge by 42% effective from the beginning of this year, though this component makes up just 4% of Top Glove’s production cost.
Raw material prices take up a significant 36% of production costs and are not easing anytime soon.
Nitrile prices are expected to increase by 8% month on month for March to around US$0.95 per kg, though this level is still way below the US$2.42 per kg logged at the end of 2020.
Latex prices are also rising steadily and will only stabilise after the wintering season ends in May.
All in, Top Glove’s production costs are expected to remain high, and the only way the group can earn a decent margin is if it can further raise its ASPs in the coming months.
Get Smart: Too early to tell
It is too early to tell if the glovemaker’s troubles are over.
The oversupply situation in the glove sector looks set to persist until the end of 2023 and competition remains stiff.
Late last year, Top Glove had already deferred all its capital expenditure for new capacity and will continue to focus on cost rationalisation initiatives.
ASP may be close to bottoming, but the jury is out as to whether the glove maker can post better financial numbers for the rest of this year.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
