Top Glove Corporation - CGS-CIMB Research 2020-11-16: Two Dormitories To Fall Under EMCO


Top Glove Corporation - Two Dormitories To Fall Under EMCO

  • Two of Top Glove’s dormitories located in Klang, Selangor, will come under the enforced movement control order (EMCO) for two weeks (17-30 Nov 2020).
  • We gather that these two dorms host up to 2,500 workers (out of a 16,000 workforce). Note that Top Glove has around 8,000 workers in the Klang area.
  • Assuming that all 2,500 workers are not allowed to work for two weeks, we estimate that Top Glove’s FY21F net profit will be negatively affected by 0.9%.

EMCO implemented in the area where Top Glove’s hostels are located

  • In a press conference today, Malaysia’s Senior Minister Datuk Seri Ismail Sabri Yaakob stated that the National Security Council (NSC) has decided to implement an EMCO in the area along Jalan Abadi 1A and Jalan Abadi 10A/KU8 in Meru, Klang, Selangor, where Top Glove (SGX:BVA)’s workers dormitories are located. This is following a spike of the number of COVID-19 cases reported in the area. As of 15 Nov 20, there were 215 positive cases.
  • This EMCO is expected to start tomorrow for a duration of two weeks (17-30 Nov 2020). In addition, we understand that NSC requires Top Glove to screen all of its workers for COVID-19, while sanitsation activities must be conducted at all of its premises.

Top Glove expects two hostels to be affected (15.6% of total workforce)

  • Based on our channel checks with Top Glove, the company is seeking clarification with government authorities on which of its foreign worker hostels will be affected.
  • At this juncture, Top Glove is of the view that only two of its hostels (one male and one female dorm) located in the area, hosting up to 2,500 workers (1,800 male and 700 female), will be affected. We also note that an estimated 35% of workers in both hostels have already been isolated/quarantined prior to this EMCO implementation.
  • Based on our estimates, Top Glove has a total of 16,000 workers, with 8,000 workers working in its factories in Klang. We also estimate that Top Glove’s Klang factories contribute up to 50% of its total current production capacity (90bn pieces p.a.).

Top Glove's FY21F net profit to be negatively impacted by 0.9%

  • At this juncture, Top Glove is still clarifying whether all the workers in these two hostels are restricted from working in the factories (it is under the impression that this is the case).
  • Assuming that all 2,500 workers (15.6% of Top Glove’s total workforce of 16,000 and 31.2% of our estimate of number of Top Glove workers in the Klang area) are not allowed to work for two weeks, we expect up to 15% of Top Glove’s total production capacity will be affected. As a result, we estimate the impact to our FY21F revenue and net profit forecasts at -0.6% and -0.9%, respectively.
  • Assuming that all of its workers located in Klang, Selangor, will be required to be screened for COVID-19 (RM330 per test), we assume that this will result in a one-off costs of RM3.2m (0.03% of our FY8/21F net profit estimates).
  • We also gather that 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.

No changes to our Top Glove's FY21-23F EPS forecast, pending further updates

  • We make no changes to our FY21-23F EPS estimates pending further updates on this matter. 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, 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. a swift resolution to 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 Top Glove’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 2020-11-16
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