WHILE production cut is an obvious outcome, it seems that the imposition of a two-week enhanced movement control order (EMCO) across the Klang Valley will turn out to be case of “you win some, you lose some” for Malaysia’s Big-Four glove makers.
At a glance, TA Securities Research expects Top Glove Corp Bhd and Kossan Rubber Industries Bhd’s FY2021 earnings to be impacted by 4.5% and 4.7% while the FY2022 earnings of Hartalega Holdings Bhd and Supermax Corp Bhd to be impacted by 3.9%/3.5%.
Looking forward, the research house expects the temporary halt in glove production in Selangor – coupled with resurgent Delta variant in more than 80 countries – to increase the lead time for gloves (currently circa 70 days) and slowdown the drop in average selling price (ASP) (currently dropping by 5-10% monthly) temporarily.
“This is given that 58% of all gloves produced in Malaysia are sourced from Selangor,” justified anayst Tan Kong Jin in a glove sector update.
Yesterday, Top Glove said it is temporarily halting the operations of its medical glove factories in Klang following the EMCO imposition.
While it is seeking more clarification from the National Security Council (MKN) on the matter, the world’s largest glove maker had its MITI (Ministry of International Trade and Industry) approval letter revoked as gloves are not under the essential services list for the current EMCO.
Similarly, Hartalega Holdings Bhd has also initiated a full shutdown of all its glove manufacturing facilities in Bestari Jaya and Sepang while Kossan Rubber Industries Bhd has also implemented a temporary stoppage of its manufacturing facilities in Klang.
As such, Supermax Corp Bhd is expected to follow suit by closing its Klang plants as all must adhere to the EMCO.
For Top Glove, TA Securities Research gathers that factories that are affected under the current EMCO represents about 55% of the group’s total capacity while 100% of Hartalega’s production will be affected given both Bestari Jaya and Sepang are under EMCO.
Likewise, all of Kossan’s glove plants (Meru, Kapar and Jeram) are also located in an EMCO vicinity. For Supermax, the research house expects the group’s production in Klang to represent circa 70% of its total capacity.
Following the revision in its earnings forecast, TA Securities Research maintained its “buy” rating on Hartalega and Kossan with a lower target price of RM10.30 (previously RM10.50) and RM3.92 (previously RM3.98) respectively.
Meanwhile it maintained a “hold” call on Top Glove with a lower target price of RM4 (previously RM4.02) and “sell” on Supermax with a lower target price of RM2.71 (previously RM2.76).
As a whole, TA Securities Research reiterated its “neutral” stance on the rubber glove sector. – July 7, 2021
