THE new minimum monthly wage of RM1500 that will come into effect on May 1 (25% rise from RM1200 currently) is expected to impact CY2022’s earnings of Malaysia’s Big-Four glove makers by circa 3% to 5% assuming minimal pass through as the industry transitions to the endemic stage.

TA Securities Research which makes the assumption further expects the transition period to last for another three quarters before glove manufacturers are able to fully pass through all their cost increases when the supply/demand situation normalises (as seen during the pre-pandemic period).

“Separately, we believe that the dependence of rubber glove manufacturers on foreign workers will remain high at 55%-65% due to low retention rate of local workers who prefer to work in a more comfortable environment,” opined analyst Tan Kong Jin in a glove sector update.

Currently, labour cost accounts for about 10% of total glove production cost. Based on its channel checks with the glove manufacturers under its coverage, TA Securities Research expects the take home pay of foreign workers to be in the region of RM1,500 to RM2,000 inclusive of overtime.

It is learnt that Top Glove Corp Bhd and Supermax Corp Bhd have already raised their minimum wage to RM1,400/month as of March 2022.

According to the Malaysian Rubber Glove Manufacturers Association (MARGMA), the higher minimum wage will result in an increase in production cost between1.4% and 2.8%.

Currently, Malaysia’s rubber glove industry employs circa 70,000 workers. However, the industry will need to add about 19,000 workers over the next few months to improve the labour shortage situation.

In a related development, TA Securities Research said average selling price (ASP) of gloves has been stabilising in the past few months due to rising cost pressure (despite the current oversupply situation).

“For instance, ASP for nitrile gloves has been hovering at US$24 to US$26/1,000 gloves (for February, March and April). We expect this to continue in 1H 2022,” projected the research house.

“Thereafter, the change in ASP is expected to be mild in-line with MARGMA’s expectation that ASP will move towards a normalised level albeit above pre-pandemic levels of US$21 to US$23/1,000 gloves.”

In the long run, the research house expects ASP to be higher by circa 10% (vs pre pandemic level) on the back of higher labour cost and social compliance cost.

All-in-all, TA Securities Research reiterated its “neutral” stance on the glove sector. Following earnings revision, it maintained its “buy” rating on Hartalega Holdings Bhd with a lower target price (TP) of RM5.62 (from RM6.02 previously).

“We maintain our “sell” recommendations on Top Glove and Supermax with lower TPs of RM1.27 (previously RM1.32) and 74 sen (previously 77 sen). Meanwhile, we downgrade Kossan Rubber Industries Bhd (TP: RM1.96) to ‘hold’ from ‘buy’ as its share price has increased over the past one month,” added the research house. – April 26, 2022

https://focusmalaysia.my/mild-impact-from-minimum-wage-hike-implementation-on-glove-sector/