• Top Glove halted its glove operations located at Selangor in compliance with the EMCO order.

• The affected Top Glove factories at Selangor contribute about 55% of its total capacity and will impact loss in earnings by c.2-3% for every 2 weeks closure.

• We reduced our FY21 earnings by c.6% to reflect the disruption in production for 2 weeks and lower utilisation rate due to longer than expected National Recovery Plan Phase 1.

• Downgrade to HOLD with lower TP of RM3.90 pegged on PER 16x based on new valuation on CY23F EPS to reflect normalized earnings.

More bad news - Gloves not considered as essential services

Top Glove confirmed that it will temporarily shut down its gloves factories in Selangor, in compliance with the EMCO order until 16th July, while waiting for clarification from Majlis Keselamatan Negara (MKN). The Miti approval letter earlier has been revoked as rubber glove is not under the essential services list for this EMCO by MKN.

Affected factories contribute c.55% of its total capacity

In total, we gather that Top Glove’s affected factories in Selangor represents about 55% of its total group capacity (circa 100 billion pcs p.a.). The company has not revealed the monetary loss resulting from this closure. However, based on back of envelope estimates, Top Glove’s earnings will be impacted by c.2-3% every 2 weeks shutdown of its Selangor factories that are under EMCO areas.

Gloves ASPs have peaked

Although we believe long term glove consumption remains solid on the back of structural change in higher glove usage due to greater hygiene awareness, near to mid-term sentiment has taken a huge hit (inclusive of ESG concern and decline in ASP). Top Glove ASPs have peaked in 1QCY21 and ASP expected to see gradual decline as glove buying urgency is anticipated to fade due to increasing percentage of global vaccinations and rising competition from existing and newcomers’ capacity which will mostly be up from 2H21 onwards. Additionally, we do not expect the current downtrend in ASP to rebound significantly if production is halted for 2 weeks only.

Downgrade to HOLD, new TP RM3.90

We cut our FY21 earnings by 6% to reflect the disruption in production for 2 weeks and lower utilisation rate due to longer than expected National Recovery Plan Phase 1 (operate at 60% workforce capacity). Hence, we have derived a lower new TP of RM3.90 (from RM6.00), pegged on PER 16x (inline with sector 10-years historical forward average) and rolled over valuation to CY23F EPS to reflect the normalized earnings moving forwards. Downgrade to HOLD from BUY.

Source: BIMB Securities Research - 7 Jul 2021