AGAINST the backdrop of Top Glove Corp Bhd’s backlash from the US Customs and Border Protection (CBP) with regard to its products, stock analysts are now wary of similar repercussion befalling its industry peers.
Such concerns, for example, have prompted Ambank Research to trim the price-to-earnings ratio (PER) of Hartalega Holdings Bhd and Kossan Rubber Industries Bhd to reflect higher regulatory risk in their export markets.
“(This is) as glove companies in general may be under heightened scrutiny following Top Glove’s recent debacle,” justified the research house in its glove sector update. “We lower Hartalega’s PER to 22 times and Kossan’s PER to 18 times respectively.”
For Hartalega, AmBank Research maintained its “hold” call with a lower fair value of RM9.86/share (previously RM11.20) based on a PER of 22 times CY2022F earnings per share (EPS). There is no ESG-related adjustment based on its three-star rating.
Similarly, the research house retained its “hold” rating on Kossan with a lower fair value of RM3.60/share (previously RM4.20) based on a PER of 18 times FY2022 EPS. There is also no ESG-related adjustment based on its three-star rating.
As for Top Glove, AmBank Research also maintained its “hold” stance on the world’s largest glove maker but with a lower fair value of RM4.75/share (previously RM5.46/share) based on a PER of 20 times CY2022F fully diluted EPS (with an ESG-adjusted discount of 3% with a two-star rating).
Given that the 25% of Top Glove’s total sales were from the US in FY2019 – and the glove maker seems unlikely to resolve this issue anytime soon – it could be looking at a sizeable drop in its customer base as glove urgency begins to fall.
“For now, high spot demand will cushion the company from any severe losses,” opined the research house.
“It is likely that glove ASP (average selling price) will be similarly affected given that gloves sold to the US typically command an estimated 5% premium. Additionally, Top Glove could further cut its ASP in an attempt to maintain its market share.”
Nevertheless, pending further clarification on its contingency plan, AmBank Research is maintaining its earnings forecasts on Top Glove.
“We feel that the status of their appeal and the company’s Hong Kong Exchange (HKEX) listing will be necessary before making any changes,” the research house pointed out.
“As a result, we lower Top Glove’s PER to 20 times to account for heightened regulatory and reputational risks as well as a potential drop in its customer base and glove ASP.”
At 12.24am, Top Glove has rebounded 9 sen or 1.99% to RM4.61 with 16.36 million shares traded, thus valuing the company at RM37.83 bil. – April 1, 2021
