TOP GLOVE CORPORATION BHD (SGX:BVA)
Top Glove - Expecting Minimal Impact From EMCO
- In a press release today, Top Glove said 5,700 of its workers in Meru, Klang will be affected by the implementation of EMCO between 17 and 30 Nov 2020.
- This means 35% of its production workforce of 16,500 will not be working during this period, leading to reduced output at Top Glove’s factories.
- We estimate this will negatively impact Top Glove’s FY21 net profit by 1.8% assuming the EMCO is not extended beyond the stipulated two-week period.
Some 5,700 Top Glove's workers to be affected by implementation of EMCO
- In a press release today, Top Glove (SGX:BVA) said the implementation of a COVID-19- driven enforced movement control order (EMCO) in Meru, Klang for a duration of two weeks (17-30 Nov 2020) will affect some 5,700 of its workers who are currently staying in several dormitories in the area.
- This represents 34.5% of Top Glove’s total estimated production workforce of 16,500, and 27.1% of its total employees (21,000, including office staff). We estimate Top Glove has an estimated 8,000 workers in Klang, while its Klang factories contribute up to 50% of its total current production capacity (90bn pieces p.a.).
Expecting factories to be operating at reduced capacity
- We understand that all 5,700 of the affected workers, who are mostly foreign labour, will not be allowed to work in the factories during EMCO. As a result, Top Glove’s factories are likely to be operating at reduced capacities in the next two weeks.
- Assuming that the EMCO is implemented for the stipulated two weeks, we estimate its impact on our FY21F revenue and net profit forecasts to be -1.3% and -1.8%, respectively.
- Note that for every week the EMCO is extended for these 5,700 workers, our FY21F net profit estimate for Top Glove will be reduced by another 0.7%.
Impact likely to be well mitigated
- Nevertheless, we believe Top Glove should be able to mitigate the impact of this EMCO via various initiatives, including:
- expediting the hiring of both temporary and permanent local workers to offset the loss of these foreign workers, as well as
- tailoring its product mix to produce only large volume orders in the factories to reduce labour requirements.
- In addition, we believe Top Glove would be able to make up for the delays once these 5,700 workers return to work.
- Top Glove does not expect any cancellation of orders or any penalty payments to its customers owing to late delivery of orders as a result of this EMCO.
Maintain ADD; target price unchanged at RM10.00
- We make no changes to our Top Glove's FY21-23F EPS estimates as we believe the impact of this EMCO will be minimal. We also reiterate our ADD call, with a target price of RM10.00, based on 17x CY22F P/E (in line with its 5-year historical mean).
- We continue to like Top Glove for being the key beneficiary of higher glove demand due to the COVID-19 pandemic, given its position as the world’s largest glove maker. Top Glove also offers appealing dividend yields of 9.2%/4.6% (CY21F/22F).
- See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
- Potential re-rating catalysts:
- swift resolution to the US Customs and Border Protection (CBP) ban placed on two of Top Glove’s subsidiaries,
- better-than-expected demand for gloves, and
- higher-than-expected gains in selling prices for gloves.
- Downside risks:
- a surge in confirmed COVID-19 cases among Top Glove’s workers,
- early wide availability of a vaccine for COVID-19, and
- a sharp decline in ASP for gloves.
Walter AW
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-11-17
SGX Stock
Analyst Report
10.000
SAME
10.000
