EMCO: Suspension of glove factories' operations affect earnings, overseas interests, says Maybank IB

Maybank IB said that the suspension of the glove factories in Selangor is expected to affect about 55 per cent of Top Glove’s and 100 per cent of Hartalega and Kossan’s total production capacity. — Reuters pic
Maybank IB said that the suspension of the glove factories in Selangor is expected to affect about 55 per cent of Top Glove’s and 100 per cent of Hartalega and Kossan’s total production capacity. — Reuters pic

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KUALA LUMPUR, July 7 — The temporary shutdown of glove factories will not only affect companies’ earnings but could also jeopardise their relationships with overseas buyers, especially when Malaysian glovemakers are facing escalating competition from China’s glovemakers.

In a research note today, Maybank Investment Bank (Maybank IB) noted that Top Glove, Hartalega and Kossan had suspended the operations of their respective glove manufacturing facilities in Selangor yesterday due to the enforcement of the Enhanced movement control order (EMCO).

The investment bank said it was taken aback by the latest development as the glove is one of the personal protective equipment (PPE) essential items, and the factories had been allowed to operate during the first MCO.

“Assuming a two-week suspension of glove factories in Selangor under EMCO, we expect our financial year 2021 (FY21) core net profit forecasts for Top Glove and Kossan to decline by 7.4 per cent and 16 per cent, respectively,” it said.

Maybank IB forecasts that Hartalega’s net profit could drop by 16 per cent in FY22 due to the suspension of operations.

It added that the suspension of the glove factories in Selangor is expected to affect about 55 per cent of Top Glove’s and 100 per cent of Hartalega and Kossan’s total production capacity.

The investment bank noted that while the impact on the glove companies’ earnings is still manageable and temporary, investor’s sentiment towards the glove counters could be further eroded by the latest development.

The sector’s outlook is currently clouded by ongoing negative news such as declining average selling price (ASP) due to intensifying competition among the new and existing glove players, as well as environmental, social and governance risks.

In a separate note, AmInvestment Bank said the shutdown will likely decelerate the slide in the glove’s ASP, as supply is temporarily capped.

“We believe that the EMCO will be implemented for at least one month, before a return to MCO conditions.

“We do not discount the possibility that these companies will be granted approvals to resume production, given the importance of gloves in managing the spread of Covid-19,” it added.

The investment bank adjusted its fair values of glove companies to incorporate the EMCO and MCO disruptions, slower declines in glove’s ASP and a sharp drop in post-pandemic glove demand.

It had also lowered its price-to-earnings ratios to factor in the factory closure-induced negative investor sentiment.

“We urge investors to look past supernormal profits brought about by the spike in cases due to the Delta variant.

“The variant may result in gentler drops in quarterly earnings, but we doubt it will affect post-pandemic glove demand in a significant way, even if the virus becomes endemic,” said AmInvestment Bank.

It noted that the Delta variant would slow the fall in glove’s ASP, as glove urgency is buoyed by the rise in cases, and the smaller decline in the ASP would help support earnings of the glove companies in the next 12 months.

As at 10.45am, Hartalega rose three sen to RM7.09, Top Glove fell two sen to RM3,92, and Supermax was flat at RM3.14. — Bernama

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