Top Glove to endure another COVID-19 blow

INVESTORS must be wondering why Top Glove Bhd is so prone of getting associated with the COVID-19 infection when nothing of such nature has been linked to three other members of the Big-Four glove makers (namely, Hartalega Holdings Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd).

The Government has ordered the temporarily closure  of 28 Top Glove’s factories in Klang in stages given the Teratai cluster which reported 1,067 cases yesterday is linked to Top Glove’s workers.

Overall, the Health Ministry had carried out 5,794 screenings with 1,889 individuals from the said cluster tested positive. Recall that, Top Glove’s worker dormitories have been placed under the enhanced movement control order (EMCO) from Nov 17 until Nov 30.

According to Top Glove’s management, the 28 factories include non-glove factories and factories in Klang which are not located in the area under EMCO.

“For glove plants specifically, a total of 19 gloves plants are located in this affected area, which works out to be around 52.7% of total group capacity.

“We gather that Top Glove has temporarily stopped production (since Nov 18) at 16 facilities in Meru, Klang partly due to worker shortage,” wrote analyst Tan Kong Jin in a company update.

The remainder 12 facilities in Meru, Klang have been operating at only 10% utilisation rate. Note that management has no clarity yet on the arrangement of stages shutdown by the authority.

“Having said that, there will be a potential loss of earnings,” justified Tan.

“Based on our back-of-the-envelope calculation, the opportunity cost could be around RM207.5 mil for 14 days of disruption at 19 plants which is around 2% of FY2021 net profit, assuming that each plant is generating profit of around RM780,000 per day.”

Nevertheless, TA Securities Research opined that it is premature to assess the potential earnings impact as the temporarily closures may further tighten the glove supply in the market, thus causing the average selling prices to rise further.

All-in, the research house maintained its “buy” rating on Top Glove with a target price of RM8.84/share while emphasising the risk of further extension to the 14-day EMCO in the affected areas where Top Glove’s plants are located.

Although the company has yet to reveal monetary losses resulting from its plant closures, AmBank Research projected the total impact to Top Glove’s revenue “to be around 2% which is not significant”.

The research house retained its “hold” rating on Top Glove with an unchanged fair value of RM7.88 pending clarity on the latest developments.

At 10.03am, Top Glove was down 43 sen or 5.85% to RM6.92 with 36.04 million shares traded, thus valuing the company at RM56.72 bil. – Nov 24, 2020

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