TOP GLOVE CORPORATION BHD (SGX:BVA)
Top Glove Corporation - Temporary Setback
- US Customs detention order may lead to short-term share price weakness.
- Top Glove aims to resolve the issue in 2-4 weeks.
- To divert sales volume to other countries, if issue prolongs.
- Maintain BUY and Target Price of RM27.80.
US customs detention order may dampen near term sentiment
Detention order by US customs.
- The US Customs and Border Protection (CBP) has placed a detention order on disposable gloves manufactured by two of Top Glove (SGX:BVA)’s subsidiaries, namely Top Glove Sdn Bhd and TG Medical Sdn Bhd, on 15 July 2020. The Group believes this is likely due to foreign labour recruitment fee issues prior to Jan 2019. During that time, foreign workers paid recruitment fees to agents – a practice that was subsequently debated, reviewed and stopped. Since January 2019, Top Glove has been bearing all recruitment fees when the Zero Recruitment Fee Policy was implemented.
Engage consultant to resolve the issue.
- Top Glove is engaging a consultant to resolve the issue, which may include paying recruitment fees to the workers. The estimated amount is RM20m-RM50m. This is equivalent to 4% of our FY20 net profit forecast.
Potential impact to earnings due to detention order.
- Top Glove targets to resolve this issue in two to four weeks. US sales account for 25% of Top Glove’s total sales. Sales of the two affected subsidiaries account for 50% of the Group’s total US sales – implying US sales for these two subsidiaries is 12.5% of total Top Glove sales.
- We estimate every four weeks that the order is in place in 4QFY20 is equivalent to:
- RM129m or 1.8% of our FY20 revenue estimate; and
- RM19m or 1.6% of our FY20 net profit estimate.
Top Glove - Valuation
Reiterate BUY and Target Price of RM27.80.
- We maintain our Target Price of RM27.80. Our Target Price is based on 39x CY21F PE, or +2 SD of its 5-year mean. Top Glove Share Price is trading at 28x CY21F PE or close to +0.8 SD of its 5-year mean PE.
- This hiccup may lead to a negative knee-jerk share price reaction. However, we believe Top Glove may divert the supply to other countries if the issue persists given the industry shortage. We gather demand in other regions/countries including Latin America, Canada, Middle East and Europe remains strong.
- See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
- Maintain BUY.
Malaysian Research Team
DBS Group Research
|
Siti Ruzanna Mohd Faruk
DBS Research
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https://www.dbsvickers.com/
2020-07-17
SGX Stock
Analyst Report
9.060
SAME
9.060
