TALKS about a possible imposition of windfall tax on glove companies in the run up to Budget 2021 has somehow pull the handbrake on the glove stock rally.
At a glance, this does not come as a surprise given the recent ‘supernormal’ profits enjoyed by the glove sector amid a surge in both demand and average selling prices (ASP) due to the COVID-19 pandemic.
Nevertheless, the fact remains that implementation of a windfall tax of any sort is bound to have negative implications on the sector, particularly the long-term prospects of major glove players.
CGIS-CIMB Research does not rule out the possibility of Malaysian glove makers opting to expand overseas if a windfall tax indeed materialises.
“This is particularly in countries which (i) offer better incentives (tax, loan interest subsidy etc.), and (ii) sufficient labour workforce,” wrote analyst Walter Aw in a sector update.
“This could result in potential opportunity loss for the government from the lower future investment by the glove players and its spill-over benefit (recurring tax collections, job creation, etc).”
According to CGS-CIMB Research’s estimates, the Big Four glove makers under its radar will invest capex of up to RM15 bil locally over the next five years.
In the research house’s view, the implementation of a windfall tax on the glove sector will be difficult to execute given the lack of standardised pricing for gloves due to the variety in types, specifications and product grades as well as intended target markets.
“We gather that several smaller glove makers had been posting minimal profits or consistently incurring losses prior to COVID-19,” Aw pointed out.
“Should a ‘windfall tax’ or of any sort on the glove sector materialise, we believe it would likely be a one-off collection/payment to the government.”
Aa sensitivity analysis based on 5% increase in tax rate by CGS-CIMB Research found that a 5% rise in corporate tax rate could cut the sector’s CY 2020F net profit by 6.5% while allowing the government to raise extra RM593 mil in taxes (CY 2020F).
Based on estimates by the research house, glove companies under its coverage are already slated to pay total corporate income tax of RM2.8 bil/RM4.7 bil for CY2020/2021F (+481%/+68.9% year-on-year).
All-in CGS-CIMB Research maintained its “overweight” stance on the glove sector pending the tabling of Budget 2021.
“We continue to like the sector given the defensive nature of its earnings and that it is a key beneficiary of robust global glove demand owing to COVID-19,” justified the research house.
But the downside risks include implementation of windfall tax on glove companies and sharp decline in ASP, it added. – Nov 4, 2020
