MIDF Research sees US seize order on Top Glove harming manufacturer’s sales, earnings in North America

General view of Top Glove headquarters in Shah Alam December 10, 2020. — Reuters pic
General view of Top Glove headquarters in Shah Alam December 10, 2020. — Reuters pic

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KUALA LUMPUR, April 9 — The United States’ Withhold Release Order (WRO) on Top Glove Corporation Bhd is expected to have a negative impact on the rubber glove manufacturer’s sales in the North America markets, MIDF Research said.

However, it believed Top Glove would be able to relocate the supply to other markets which are experiencing a resurgence in Covid-19 cases.

“Its factories outside of Malaysia will still be able to export to the US. As such, we do not expect the WRO to have a significant impact on Top Gloves’ sales and earnings,” it said in a note today.

It noted that Top Glove had recently said its rubber gloves average selling price (ASP) would be adjusted by about five per cent to match the current market prices.

MIDF opined that the reduction in sales to the US might have a slight negative impact to its ASP due to the higher ASPs in the region.

“That said, we believe that the diversion of trades to other markets will cushion the impact.

“Moreover, its production capacity was capped by the halt in operations previously. Hence, the higher volume produced is likely to offset the impact in ASP adjustment,” it said.

Yesterday, Top Glove held a briefing to update on the improvement it has made based on the findings of the International Labour Organisation’s (ILO) forced labour indicators.

It said that it would continue to rectify existing issues so that the US Customs Border Protection (CBP) would modify or revoke the WRO.

Of the 11 findings, six have been resolved, and the company is looking to resolve the debt bondage issue as it had paid out the final tranche of the remediation fees to its foreign workers earlier this month.

As such, MIDF has maintained its “buy” call on the company, with an unchanged target price of RM8.29.

Similarly, Kenanga Research, which had set an “outperform” call on the company, said Top Glove’s ASP is expected to soften, albeit at a slower pace on the back of still robust demand.

“In the second quarter financial year 2021 results’ briefing, the group highlighted that nitrile glove’s ASP is expected to decline by between three to five per cent month-on-month or adjusted down to be in line with peers.

“Management is of the view that the ASP is unlikely to fall off a cliff despite average lead time being reduced from 300 days in early Jan 2021 to 170 days currently, compared to 20-30 days pre-Covid-19,” it said.

Kenanga Research said post-Covid-19, the inventory restocking cycle is expected to spur demand, coupled with increased usage arising from new users and increased hygiene awareness.

“We still see significant value being derived from Malaysian glove players which command 65-68 per cent of global market share. Downside risk to our call is lower-than-expected ASP in the second half of 2021,” it said.

Meanwhile, AmInvestment Bank maintained a “hold” call on the company, as it is still wary of falling glove ASP, impact from of the WRO and the accompanying reputational risks.

“We believe that until the CBP lifts the sanction, Top Glove’s future outlook remains significantly uncertain,” it said.

At 11.57am, Top Glove’s shares fell 14 sen to RM5.26, with 21.26 million shares transacted.  — Bernama

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