A letter for glove maker Top Glove to operate in an EMCO area in Selangor has been revoked. We understand that glove manufacturers will not be classified as essential services during the duration of the EMCO. As such, this should impact all glove players with factories within EMCO zones. We lower Top Glove and Kossan’s FY21 forecasts by 6.1% and 8.6% respectively and Hartalega’s FY22 forecasts by 9.2%. This is to account for lower sales volume. After adjustments to our forecasts, our TP for Top Glove (RM6.72 to RM6.66), Hartalega (RM13.85 to RM13.74) and Kossan’s (RM5.54 to RM5.48) are adjusted downwards slightly. Maintain OVERWEIGHT

NEWSBREAK

A letter for glove maker Top Glove to operate in an Enhanced Movement Control Order (EMCO) area in Selangor has been revoked, said a source in the International Trade and Industry Ministry (MITI). (Malaysiakini)

HLIB’s VIEW

After checking with Top Glove, we understand that glove manufacturers will not be classified as essential services during the duration of the EMCO. As such, this should impact all glove players with factories within EMCO zones. We estimate that this would impact 23 of Top Glove’s factories (or 55% of their total capacity). As Hartalega and Kossan’s factories are predominantly located in Selangor, which is mostly under EMCO, we reckon the impact on Hartalega and Kossan’s sales volumes to be more pronounced.

We view this as a minor hiccup for the glove industry, as the lesser production volumes would result in a near term shortage in global glove supply. Notably, MARGMA estimates that Malaysia accounts for 60-65% of the total glove supply globally. As a partial offset, we expect the short term shortage in glove supply to slow down the decline in glove ASPs in 2H21.

Forecast. We lower Top Glove and Kossan’s FY21 forecasts by 6.1% and 8.6% respectively. We lower Hartalega’s FY22 forecasts by 9.2%. This is to account for lower sales volume.

Maintain OVERWEIGHT. After adjustments to our forecasts, our TP for Top Glove (RM6.72 to RM6.66), Hartalega (RM13.85 to RM13.74) and Kossan’s (RM5.54 to RM5.48) are adjusted downwards slightly. We value the glove companies using with their pre-pandemic 5-year average PE multiple of (CY15-19) based on sustainable earnings in a post-super normal earnings environment summed with free cash flows (both discounted back to PV) generated during the boom period. This encompasses earnings in a post-pandemic era as well as high profits generated during the pandemic (Figure #2-4). Our top pick remains Top Glove (BUY, TP: RM6.66).

Source: Hong Leong Investment Bank Research - 7 Jul 2021