Top Glove to endure production shortfall and ‘humanistic’ cost

TOP Glove Corp Bhd is likely to encounter disruption on its production process for a period between two weeks to a month following the closure of its 28 plants stemming from a spike in COVID-19 infection among its workforce.

Additionally, Hong Leong Investment Bank (HLIB) Research expects the extended movement control order (EMCO) and closure of factories to pose expenses ranging from COVID-19 testing to new hostels/hotels to host the workers while quarantining them as well as to provide them with three daily meals during the period.

“As we understand, the COVID-19 testing cost per test of RM150 is fully claimable from SOCSO, while some urgent tests could cost more than RM200,” wrote analyst Farah Diyana Kamaludin in a company briefing update.

Yesterday, Top Glove’s management said the company will divert orders to unaffected factories with key focus on nitrile gloves. Hence, factories with the capabilities to produce nitrile will be asked to produce more nitrile gloves rather than latex gloves.

Top Glove also gave assurance that distribution of raw materials to other factories would not be a hassle.

“However, as most factories are already running close to full capacity, we still feel it would be a challenge to make up for the shortfall from the affected factories,” observed the research house. “Therefore, we may expect industry average selling prices (ASP) to increase on the supply shortage.”

While Top Glove’s management is still awaiting clarification from authorities on how the staggered closures would be, the company is optimistic on ramping back up utilisation up to circa 30% in the near term with the gradual increase of workers.

All-in HLIB Research maintained its “buy” rating on Top Gove with an unchanged target price of RM10.38.

Meanwhile, TA Securities Research expects the opportunity cost to be around RM218.4 mil for 14 days of disruption at 20 of the affected Top Glove plants or around 2.1% of the company’s FY2021 net profit, assuming that each plant is generating profit of around RM780,000 daily.

“However, we believe it is premature to assess the potential earnings impact as the temporarily closures may further tighten the glove supply in the market, causing the ASP to rise further,” noted analyst Tan Kong Jin.

“The overall impact is minimal as the group is expected to gradually ramp up its utilisation rates after workers returning from 14 days quarantine.”

On the overall, the research house also reiterated its “buy” call on Top Glove with an unchanged target price of RM8.84/share based while stressing that key risks are further extension of the EMCO and if the cluster spreads to other plants outside the EMCO area.

At 9.30am, Top Glove was down 17 sen or 2.5% to RM6.63 with 9.98 million shares traded, thus valuing the company at RM54.34 bil. – Nov 25, 2020

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