Top Glove - CGS-CIMB Research 2020-11-24: All Manufacturing Facilities In Meru To Be Temporarily Closed

TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - All Manufacturing Facilities In Meru To Be Temporarily Closed

In tandem with yesterday’s government directive, Top Glove (SGX:BVA) will implement a temporary stoppage in stages of all its production facilities in Meru, Klang.
We estimate that Top Glove’s factories in Klang, Selangor, make up an estimated 50% of its total production capacity (90bn pieces p.a.).
Assuming that all 28 of its Klang factories are shut down for two weeks, we estimate that our Top Glove's FY21F profit forecasts will be negatively impacted by 1.9%.

In a press release yesterday, Top Glove announced that it will implement a temporary stoppage in stages of all its manufacturing facilities (28 plants) in Meru, Klang. This is on the back of the government’s directive to temporarily shut down all of Top Glove’s factories in Klang in order to allow for further COVID-19 screening and quarantine of its workers.
We understand that this course of action has been taken as 1,889 of Top Glove’s workers have tested positive for COVID-19, out of the 5,794 workers screened. According to Top Glove, most of its workers who tested positive for COVID-19 were asymptomatic.

In total, we gather that Top Glove has a total of 41 factories in Malaysia. We understand that 28 factories are located in Meru, Klang, 19 of which are glove factories and nine factories are for production of glove-related supplies (formers) and condoms. Based on our estimates, Top Glove’s Klang factories contribute up to 50% of its total current production capacity (90bn pieces p.a.).
According to Top Glove, it has temporarily stopped production at 16 of its plants in Meru, Klang, since 18 Nov 20 while we gather that the 12 other plants in the area are currently running at only 20% utilisation rate.

Also, the government has ordered for all TOPG workers in the Meru, Klang, area to undergo COVID-19 testing. This includes workers (an estimated 2,300) who were not affected by the implementation of the EMCO.
To recap, a total of 5,700 of Top Glove’s workers were affected by 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).
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 that Top Glove has an estimated 8,000 workers in Klang.

Assuming that all 28 plants in Meru, Klang (total of 45bn pieces p.a.), are not operational for a duration of two weeks, we estimate that the impact on our FY21F net profit forecast will be -1.9%.
Note that for every week that all 28 plants are non-operational, our FY21F net profit estimate for Top Glove will be reduced by another 0.9%.

We keep our Top Glove's FY21-23F EPS estimates, as we await further updates on this matter. We also keep our ADD call and 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 as it is the key beneficiary of higher glove demand due to the COVID-19 pandemic given its position as the world’s largest glove maker.
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:
1. swift resolution of the US Customs and Border Protection (CBP) ban placed on two of Top Glove’s subsidiaries,
2. better-than-expected demand for gloves, and
3. higher-than-expected rise in selling prices for gloves.
Downside risks:
1. a surge in confirmed COVID-19 cases among TOPG’s workers,
2. discovery of a cure/vaccine for COVID-19, and
3. a sharp decline in ASP for gloves.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-24

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