Defence Minister announced to close 28 of Top Glove factories temporarily. While we are still uncertain on the time frame of the closures, we are slightly negative on the news. The closures are expected to impact c.50% of Top Glove’s total capacity. We cut FY21 earnings by -5.6% to reflect in the temporary disruption following the closure of factories; this prudently assumes 1 month of closure for the affected glove factories. Post earnings adjustments, our TP decreases to RM10.38 (from RM10.95). Our TP is pegged to PE multiple 14x (-1.5SD below 5 year mean) tagged to FY21 EPS. Maintain BUY.

NEWSBREAK

Defence Minister, Datuk Seri Ismail Sabri Yaakob announced a total of 28 Top Glove factories in Klang, Selangor will cease operations in stages.

HLIB’s VIEW

Adhere to authorities. While we are unsure on the time frame for the said factories closure, we believe Top Glove will work closely and cooperate fully with authorities to implement stoppage by stages of its manufacturing facilities in Meru, Klang. As we understand, of the said 28 factories, 21 are glove factories and the remaining 7 are nonglove factories (i.e. producing condom, face mask, dental dam). Of the 21 glove factories, 2 are located further from the affected area whereas the remaining 19 factories in the area represents about c.50% for Top Glove’s total capacity (c.45bn pieces).

Disruption. While we are still unsure on the factories’ closure schedule and timeline, we expect some disruption in production for 2 weeks to a month. Also, Top Glove is said to be ramping up production in their other factories; however as most factories are already running close to full capacity, we reckon it would be tough to make up for the shortfall from the affected factories. .

Forecast. We decrease our FY21 earnings by -5.6% to reflect in the temporary disruption from the closing of factories. This prudently assumes all the 19 affected factories will be closed for 1 month. A quicker resolution timeline would present upside to our revised earnings.

Maintain BUY, TP: RM10.38. Post earnings adjustments our TP decreases to RM10.38 (from RM10.95). Our TP is pegged to PE multiple 14x (-1.5SD below 5 year mean) tagged to FY21 EPS. Maintain BUY.

Source: Hong Leong Investment Bank Research - 24 Nov 2020