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 TOPGLOV 7113 TOP GLOVE CORPORATION BHD and Hartalega to be booted out?

PETALING JAYA: The poor valuation of glove stocks amid bearish sector fundamentals and lack of investor interest may signal underlying fears that the counters will likely be excluded from the FBM KLCI in the next biannual round of index component reviews in December.

The two glove makers in the FBM KLCI, Top Glove Corp Bhd and Hartalega Holdings Bhd, are likely to be excluded from the 30-stock index as their market capitalisation have fallen drastically.

Top Glove and Hartalega have seen their market capitalisation drop to RM8.1bil and RM9.7bil respectively.

Top Glove’s share price has plunged by almost 79% over the past 12 months to 98.5 sen yesterday while Hartalega has declined by 66.4% to RM2.82.

The only other FBM KLCI constituent with a market capitalisation of below RM10bil is tech concern Inari Amertron Bhd, which is valued at RM9.6bil.

A dealer said the exclusion of Top Glove and Hartalega is bound to happen as glove stocks are no longer the darling of investors as concerns grow about their pricing power the companies have in a product market suffering from oversupply.

Pankaj C. Kumar, the managing director of Datametrics Research and Information Centre, said Top Glove and Hartalega look set to exit FBM KLCI at a time when they are trading at nearly five-year lows.Pankaj C. Kumar, the managing director of Datametrics Research and Information Centre, said Top Glove and Hartalega look set to exit FBM KLCI at a time when they are trading at nearly five-year lows.

Ironically, at its height in August 2020, Top Glove was 40 sen a share away from unseating Malayan Banking Bhd as the largest capitalised stock on Bursa Malaysia, after the former’s market capitalisation exceeded RM78bil.

At the same time, Hartalega emerged as one of the top five stocks valuable counter on FBM KLCI, with a market capitalisation of over RM58bil.

Glove stocks were the biggest beneficiary of Covid-19, as they rode high on skyrocketing demand for gloves and surging selling prices. However, the euphoria over glove companies was short-lived.

Supermax Corp Bhd, one of the Big Four local glove makers, was booted out of FBM KLCI in June 2021 after being added into FBM KLCI in December 2020.

In contrast, Hartalega was included in the benchmark index in June 2018, followed by Top Glove in December the same year.

Pankaj C. Kumar, the managing director of Datametrics Research and Information Centre, said Top Glove and Hartalega look set to exit FBM KLCI at a time when they are trading at nearly five-year lows.

He added the market benchmark has “in a way” suffered a blow due to the sell-off on the two stocks.

“Whether the index performs better or not will depend on which stock is going to replace the two glove stocks as well as the prospects of the two new additions.

“I do hope these two glove stocks remain on FBM KLCI as they represent a unique sector exposure for institutional investors and a reflection of Malaysia’s global market position as the world’s No.1 glove manufacturer,” he told StarBiz.

Top Glove’s share price has plunged by almost 79% over the past 12 months to 98.5 sen yesterday while Hartalega has declined by 66.4% to RM2.82.Top Glove’s share price has plunged by almost 79% over the past 12 months to 98.5 sen yesterday while Hartalega has declined by 66.4% to RM2.82.

As at March 31, Top Glove and Hartalega collectively held an indicative weightage of 3.76% in FBM KLCI, according to FTSE Russell.

In the event Top Glove and Hartalega are removed from FBM KLCI, they will be replaced from one of the stocks in the FBM KLCI reserve list.

Earlier this month, FTSE Russell said the reserve list comprises five highest ranking non-constituents of the index by market capitalisation, namely Westports Holdings Bhd, QL Resources Bhd, AMMB Holdings Bhd, Malaysia Airports Holdings Bhd and Gamuda Bhd.

“The reserve list will be used in the event that one or more constituents are deleted from the FBM KLCI in accordance with the index ground rules during the period up to the next semi-annual review,” stated FTSE Russell.

Based on FTSE Russel’s rules, a stock would be included as a component of the FBM KLCI if its market capitalisation is at the 25th place or above, while one will be removed if it falls to the 36th spot and below.

Earnings of glove makers have begun to normalise following a drop in demand while output has risen from both existing and new players.

Investment bank J.P. Morgan, in a June 15 report, noted that excess capacity had led the glove industry into loss-making territory, even for the efficient players.

“We estimate it will take seven years for the excess capacity to be digested unless there is exit of new entrants plus significant delay in expansion plans

“We have kept 2023 margin assumptions similar to pre-Covid-19 levels as it is difficult to forecast bottoming in margins.

“We assign suppressed valuations to compensate for the downside risk to profits,” it said.

In the case of Top Glove, UOB Kay Hian Malaysia Research analyst Philip Wong said the earnings for the third quarter ended May 31 disappointed as average selling prices remain soft.

“Amid rising inflationary costs, Top Glove may have difficulty passing on its cost increases. Positively, Top Glove remains operationally profitable unlike its smaller listed peers and major China producers,” he said in a note on June 10.

In addition to the normalising demand, the fact that some of the glove manufacturers were hit by forced labour allegations has also affected the investor sentiment.

For example, Top Glove and Supermax were slapped with the Withhold Release Orders (WROs) issued by the US Customs and Border Protection, aimed at stopping the importation of their products into the United States.

Hartalega buildingHartalega building

Top Glove have resumed exports to the United States after the import ban was lifted.

The WROs were issued following allegations about the use of forced labour in the companies’ manufacturing.

Amid such challenges, Pankaj said glove companies provided value to investors as share prices have dropped to levels last seen five years ago.

“Some of the glove makers are sitting on a good cash pile and should be able to weather the storm over the next year or so.

“In fact, I foresee the industry going through a transformation yet again as excess capacity will be removed either due to takeover or plant closure, especially among the newbies.

“The right cue for investors would be if there is an uptick in capacity utilisation as well as glove makers’ ability to pass on additional cost pressures,” he added.

https://www.thestar.com.my/business/business-news/2022/06/21/top-glove-and-hartalega-to-be-booted-out

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