Top Glove Shared Some Updates on the Closure of Its Factories. Management Is Still Awaiting Clarification From Authorities on How the Staggered Closures Would Be. We Expect Production to be Slightly Disrupted Between 2 Weeks to a Month. That Said, They Are Optimistic on Ramping Back Up Utilisation Within the Coming Month. We Maintain Our Forecast, Reiterate Our BUY Call With Unchanged TP of RM10.38. Our TP Is a Function of FY21 EPS Pegged to PE Multiple 14x (-1.5SD Below 5 Year Mean).

We attended Top Glove’s virtual briefing on updates pertaining to the news on closure of its factories. Here are some key takeaways:

28 factories to be closed. With regards to the closure of 28 factories belonging to Top Glove, management shared that it is awaiting further clarification from the authorities and would adhere to them properly. Top Glove is being proactive by deciding to test all of its remaining workers within the affected area. For perspective, Top Glove has 8.2k factory workers in Klang, with 1.25k yet to be tested.

Disruption. Of the 28 affected factories, 20 are glove factories and the remaining 8 are producing dental dams, condoms and face masks. The 20 affected glove factories make up c.50% of Top Glove’s total glove capacity. We gather the 20 affected glove factories in Klang have been running at c.10% utilisation; this was due to lesser workers available with the impact of the earlier 14 days EMCO imposed on its workers dormitories. With the closures of factories, we expect production to be slightly disrupted between 2 weeks to a month. Top Glove shared that it will divert orders to other factories, with 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 assured 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. Therefore, we may expect industry ASP to increase on the supply shortage.

Costs. The EMCO and closure of factories are expected to pose new expenses on Top Glove. Such costs would include Covid-19 testing, new hostels and/or hotels to host the workers while quarantining, and providing food (3 meals per day) during the period. As we understand, for Covid-19 testing, cost per test of RM150 is fully claimable from SOCSO, while some urgent testings’ could cost RM200+.

Ramp up on utilisation. Top Glove has a clear plan of increasing its utilisation in stages. This is by having workers who are negatively tested for Covid-19 to start back work after the 14 days of quarantine, while those that were tested positive will only be allowed back once cured. Top Glove is confident that utilisation can be ramped up to c.30% in the near term with the gradual increase of workers. Furthermore, none of Top Glove workers are being treated in ICU, and most of them are asymptomatic. Additionally, Top Glove also has plans on employing more local workers to overcome labour shortages. Thus, we are optimistic on the utilisation increase in the coming months.

Forecast. We leave our forecasts unchanged at this juncture. Our forecast has pencilled in a full month closure impact on c.50% of its glove capacity.

Maintain BUY, TP: RM10.38. We maintain BUY with unchanged TP of RM10.38. Our TP is a function of FY21 EPS pegged to PE multiple 14x (-1.5SD below 5 year mean).

Source: Hong Leong Investment Bank Research - 25 Nov 2020