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TA Securities trims earnings forecasts, target prices for Hartalega, Top Glove, Supermax amid higher

KUALA LUMPUR (April 26): TA Securities Holdings Bhd has trimmed its earnings projection for rubber glove companies Hartalega Holdings Bhd, Top Glove Corp Bhd and Supermax Corp Bhd due to the higher minimum wage of RM1,500.

“We trim Hartalega, Top Glove and Supermax’s FY22/FY23/FY24 earnings forecasts by 0.0%/3.6%/3.4%, 3.2%/3.9%/3.7% and 0.7%/4.6%/4.7% respectively after factoring in the higher minimum wage,” said TA Securities analyst Tan Kong Jin in a client note on Tuesday (April 26).

The research house has also lowered its target prices (TPs) for the three stocks. It has maintained its "buy" recommendation for Hartalega but trimmed the stock’s TP to RM5.62 (from RM6.02).

“We maintain 'sell' recommendations on Top Glove and Supermax with lower TPs of RM1.27 (previously RM1.32) and RM0.74 (previously RM0.77) based on CY23 PE (price-to-earnings) of 22 times and 14 times respectively,” said Tan.

At the time of writing on Tuesday, Hartalega shares were trading up 1.11% at RM4.56 with a market value of RM15.63 billion. Top Glove inched up 1.75% to RM1.74 with a market capitalisation of RM14.28 billion.

Supermax rose 1.82% or two sen to RM1.12, valuing the group at RM3.05 billion.

The research house, quoting the Malaysian Rubber Glove Manufacturers Association (MARGMA), said the higher minimum wage of RM1,500 from May 1 (from RM1,200 currently) will result in an increase in glove production costs of between 1.4% to 2.8%.

“MARGMA added that the industry itself has been paying more than RM1,500. Currently, the rubber glove industry employs circa 70,000 employees. However, the industry will need to add about 19,000 workers over the next few months to improve the labour shortage situation.

“Based on our channel checks with the glove manufacturers under our coverage, foreign workers' take-home pay is estimated to be at around RM1,500 to RM2,000 inclusive of overtime fees. Moreover, as of March 2022, we note that Top Glove and Supermax have already raised their minimum wage to RM1,400 per month,” said Tan.

With labour costs accounting for only about 10% of total production costs, TA Securities estimates that profits for the glove manufacturers under its coverage will be impacted by about 3% to 5% in 2022, assuming minimal pass-through as the industry enters the Covid-19 endemic stage.

The research house also expects the endemic transition period to last for another three quarters before glove manufacturers will be able to pass on the entire cost increase (as seen during the pre-pandemic period) as the supply or demand situation normalises.

“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 works in a more comfortable environment,” said Tan.


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