THE business disruption emanating from the imposition of a two-week enhanced movement control order (EMCO) that affects 27% or 5,700 of Top Glove Corp Bhd’s workforce is bound to have financial consequence on the company’s coffer.
Considering that Top Glove’s factories are likely to be operating at reduced capacities over the next two weeks, CGS-CIMB Research estimates a negative impact on the company’s FY8/2021 revenue and net profit by -1.3% and -1.8% respectively.
“Note that for every week the EMCO is extended for these 5,700 workers, our FY8/2021F net profit estimate for Top Glove will be reduced by another 0.7%,” wrote analyst Walter Aw in a company update.
Nevertheless, the research house opined that Top Glove should be able to mitigate the impact of the EMCO via various initiatives, including: (i) expediting the hiring of both temporary and permanent local workers to offset the loss of these foreign workers, as well as (ii) by tailoring its product mix to produce only large volume orders in the factories to reduce labour requirements.
“In addition, we believe Top Glove would be able to make up for the delays once these 5,700 workers return to work,” noted Aw. “It does not expect any cancellation of orders or any penalty payments to its customers owing to late delivery of orders as a result of this EMCO.”
All-in, CGS-CIMB Research made no changes to its FY2021-2023F earnings per share estimates on Top Glove as it believes the impact from the EMCO will be minimal.
On the same note, the research house also reiterated its “add” call on Top Glove with a target price of RM10.00.
“We continue to like TOPG for being the key beneficiary of higher glove demand due to the Covid-19 pandemic, given its position as the world’s largest glove maker,” projected CGS-CIMB Research. “The stock also offers appealing dividend yields of 9.2%/4.6% (CY2021F/2022F).”
The downside risks for Top Glove at the moment remains (i) a surge in confirmed COVID-19 cases among its workers, (ii) early wide availability of a vaccine for COVID-19; and (iii) a sharp decline in average selling prices for gloves.
At 10.38am, Top Glove was down 2 sen or 0.29% at RM6.98 with 19.84 million shares traded, thus valuing the company at RM57.21 bil. – Nov 18, 2020
