Malaysia Gloves Sector - Maybank Kim Eng 2021-07-07: Sector Facing A Triple Whammy

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Malaysia Gloves Sector - Sector Facing A Triple Whammy

Temporary hiccup but sentiment hit

• We are negatively surprised by the latest development in the glove sector where Top Glove (SGX:BVA), Hartalega and Kossan have initiated a full shutdown of their glove manufacturing facilities in Selangor due to the enforcement of the EMCO.
• While the impact on glove companies’ earnings will be temporary, investors’ sentiment on glove counters could be further hit by the latest development over the short term. We maintain Neutral on the glove sector pending further information.

Unexpected shut down of glove operations on EMCO

• Yesterday, Top Glove, Hartalega and Kossan have initiated full shut down of their entire glove manufacturing facilities in Selangor due to the enforcement of the EMCO. The unexpected shut down of operations could be due to the stubbornly high Covid cases that linked to workplace clusters in Selangor, we reckon. The latest suspension of the glove factories in Selangor are expected to affect about 55% of Top Glove and 100% of Hartalega and Kossan’s total production capacity.

A negative surprise

• We are negatively surprised by the latest development as glove was one of the personal protective equipment (PPE) essential items and factories were allowed during MCO1.0. In our view, the temporary shutdown of glove factories will not only affect the companies’ earnings but could also jeopardise their relationships with overseas buyers especially when the Malaysian glove makers are currently experiencing escalating competition from the China glove makers.

Triple whammy

• Assuming a 2-week suspension of glove factories in Selangor under the EMCO, we expect our FY21 core net profit forecasts to decline by -7.4% for Top Glove and -16% for Kossan. As for Hartalega, our FY22 net profit forecast could drop by -16% on the full shut down.
• While impact on the glove companies’ earnings are still manageable and temporary, investor sentiment towards the glove counters would have been further eroded by the latest development. The sector is currently clouded by on-going negative news such as:
  1. declining ASP due to intensifying competition among the new and existing glove players; and
  2. ESG risks.

Top Glove - Production hit by EMCO

• Top Glove is temporarily halting the operations of its medical glove factories in Klang following the imposition of the EMCO in the district. The company is now awaiting clarification from the National Security Council (MKN) on the suspension. No further details are given for now .
• The latest suspension of Top Glove’s factories in Klang on EMCO would affect about 55% of its total production capacity. A 2-week suspension could lead to -7.4% decline in our FY21 core net profit forecast, we estimate. While the impact on FY8/21 earnings remains manageable for now, investors’ sentiment on glove counters could be further hurt by the latest development.
• See
  • Top Glove's Share Price,
  • Top Glove's Target Price,
  • Top Glove's Analyst Reports,
  • Top Glove's Dividend History,
  • Top Glove's Announcements,
  • Top Glove's Latest News.
• We maintain our earnings forecasts and MYR3.98 target price for Top Glove (16x CY23 PER). Reiterate HOLD.
• Our preferred pick for the sector: Hartalega.

Wong Wei Sum CFA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2021-07-07

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.450 SAME 1.450