Top Glove Reported a Downbeat Set of Earnings: Is a Turnaround in Sight for the Company?
Top Glove Corporation Berhad (SGX: BVA) is not having an easy time.
The world’s largest glove maker is facing strong headwinds as the pandemic recedes and the world is left with an abundant oversupply of rubber gloves.
From a high of S$3.10 back in August 2020, Top Glove’s share price has plunged by 91.3% to its current S$0.27.
The glovemaker’s share price is now even lower than the S$0.51 it traded at the beginning of the pandemic.
Top Glove recently released its fiscal 2023’s third quarter (3Q FY2023) earnings for the period ending 31 May 2023.
Unsurprisingly, it was another set of downbeat numbers as the group continued to bleed red ink.
We review its latest numbers to see if it can pull off a turnaround anytime soon.
An operating and net loss
Revenue for the quarter came in at RM 530.6 million, a 64.5% year-on-year plunge from the prior year’s RM 1.5 billion.
It was also 14% below the previous quarter’s revenue of RM 618 million as higher average selling prices (ASPs) were offset by lower sales volume (more on this later).
Top Glove incurred an operating loss of RM 118.9 million for 3Q FY2023, reversing the RM 31.6 million operating profit a year ago.
Net loss came in at RM 130.6 million versus a net profit of RM 15.3 million in 3Q FY2022.
The group’s balance sheet held RM 987.9 million of cash and investment securities against total loans of RM 637.5 million.
Top Glove also managed to squeeze out a positive operating cash flow of RM 55.2 million for the first nine months of FY2023 (9M FY2023).
However, there was a free cash outflow of RM 180.9 million although capital expenditure was slashed from RM 748.8 million a year ago to just RM 236.1 million.
ASPs are up but sales volume is down
Top Glove has increased its average ASP by 6% for 3Q FY2023 compared with 2Q FY2023 to cope with inflation and higher costs but the higher prices have caused a 21% fall in sales volume over the same period.
The move was done as glovemakers cannot absorb rising costs indefinitely and other players have also followed suit.
However, the situation remains grim.
Customers are placing smaller orders while price competition remains intense among glove manufacturers.
There’s good news though.
Customers’ glove inventory is close to depletion and management expects replenishment to commence in the second half of 2023.
Managing Director Lim Cheong Guan also noted that glove consumption has increased post-pandemic because of elevated hygiene and health awareness.
This trend bodes well for Top Glove as it signals a strong and growing demand for rubber gloves.
Measures to further cut costs
Meanwhile, Top Glove has undertaken further measures to reduce its cost base.
It has decommissioned several production lines, thereby reducing its glove production capacity from 100 million pieces to 95 million.
The group also temporarily stopped production at 17 of its 49 factories to ease the oversupply situation.
Elsewhere, Top Glove also conducted a “workforce rationalisation” exercise in which it laid off 600 of its workers, reducing its manpower from 12,600 to 12,000.
These measures should alleviate cost pressures in the interim while the group adjusts production to cater to the new normal.
T6 turnaround plan
In addition to the above, management has also devised a six-point turnaround plan known as “T6”.
The first step is to boost the sales volumes of specialised and surgical gloves as the field is less competitive such that Top Glove will enjoy an edge.
The second point is to enhance product quality to make its gloves a top choice for customers.
The third will be to increase production efficiency by maximising the utilisation rate and tapping into its biomass capabilities.
The fourth point is to streamline its workforce to improve productivity while ensuring foreign workers are efficiently utilised.
Top Glove also plans to strengthen its balance sheet by selling any excess land bank, hoping to raise around RM 300 million.
Finally, the group plans to streamline processes and re-negotiate its procurement contracts.
Get Smart: A turnaround will take more time
It is admirable to see management come up with a structured plan for turning the company around.
However, the oversupply situation has not eased yet and competition remains stiff among the glove players.
Hence, any turnaround will still need more time and it is unlikely that Top Glove will get any respite in the near term.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
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