Top Glove - CGS-CIMB Research 2020-11-17: Expecting Minimal Impact From EMCO


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:
    1. expediting the hiring of both temporary and permanent local workers to offset the loss of these foreign workers, as well as
    2. 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 | https://www.cgs-cimb.com 2020-11-17
SGX Stock Analyst Report ADD MAINTAIN ADD 10.000 SAME 10.000