I am quite hesitant to write another glove commentary as I believe that my earlier article on "Yield Will Protect Gloves Share Price From Falling Further" would
have ease investors' concern on the sector. Shortly after I wrote the
article, Top Glove Chairman during the press conference mentioned Top
Glove yield is expected to be more than 6% in FY 2021. Later on, a
clarification statement to Bursa by Top Glove indicates the yield would
be 8% based on Bloomberg consensus forecast in earnings and existing 50%
dividend policy. This is in line with my forecast of Top Glove's yield
and by extension it provides a good guesstimate of FY 2021 performance
for the glove sector as a whole. Even recent Comfort Gloves results was
unbelievable.
After
Top Glove conference, it attracted investors interest for awhile.
Sadly, it was short lived as the share price for Top Glove stabilised
before the issue of windfall tax was raised again by politicians before
the Minister of Finance closed the topic for good. As the glove stocks
was finally showing some colour, the continuous Covid-19 case reports
and subsequent Labour Department raid for Top Glove Ipoh dorms dampened
sentiment further. This led to opening of an investigation paper when
the law was said to only take effect next year under a new act by the
Minister of Human Resource himself in the media.
With
all these avalanche of bad news impacting Top Glove, it would be very
normal for the share price of glove stocks to be impacted and
underperform. This negative sentiment will naturally spill over to other
glove stocks for fear of similar kind of targeting by Ministry of Human
Resource / Labour Department. If indeed Malaysia's Labour Law and
Labour Department is fair and efficient in their inspection or
enforcement, I believe this issue would not only be applicable to the
Glove Sector but others such as Plantation, Construction.
The
glove stocks share price movement has nothing to do with trends,
fundamentals or earnings performance anymore. It comes down to only 1
important factor - Confidence. Investor Confidence, Consumer
Confidence, Business Confidence are all key driving forces that moves
the machinery of the economy forward. In the stock market, investor
confidence is the most important. If there is no investor confidence, it
is hard for the share price to perform. Investor confidence is a
qualitative factor that is tough to quantify via common financial
analysis.
I
am by no means absolving Top Glove of their responsibility in providing
a good accommodation, welfare and environment for their foreign
labourers. Top Glove who always tout themselves as the world's
largest glove manufacturer with 26% of world market share should have
taken preemptive measures to ensure such problems are rooted out from
their system in entirety. Top Glove not only represent the country's
proud glove sector, they also put Malaysia on the map. This would be a
painful but good learning experience for the company. I believe Top
Glove will come out a better and stronger corporation after this string
of incidents.
Most
know that I am believer in the glove story, as it has growth,
fundamentals and importantly the scale of a global market to do well
continuously. I have written many articles on the sector and although my
top picks of the sector has always been Riverstone and Hartalega, I
still deem Top Glove as a very sound company. In fact, I think companies
like Sri Trang, Kossan, Supermax, Comfort, UG Healthcare are strong. Many
regard the glove companies as "lucky" to benefit from a global
pandemic. A prominent politician even call it "Durian Runtuh". I beg to
differ. Luck is when preparation meets opportunity. The glove makers
that survive from intense competition of over 300 players in a crowded
sector in 1990s to only 45 world class players today is no mean feat.
They did so through sheer grit, hard work and innovation with no direct
subsidy or bail out from the Government of Malaysia. In addition, they
contribute significantly to employment opportunities and tax revenue
& levy to the company. Latex glove makers also help the dwindling
rubber planters and Nitrile glove makers drew foreign investment like
Great Britain's Synthomer to Malaysia. Even Petronas is venturing to
Nitrile Butadiene (raw material for glove industry) seeing the huge
potential in the industry. In a nutshell, the glove sector despite
this period of negativity is a sector we as Malaysians should be very
proud of. We have no FAANG corporations in our country, but we have
these glove giants.
So
if you are in a dilemma whether to hold glove stocks, I just have this
to say - "It cant get any worst than this". Vaccines, Covid-19 cluster,
investigation / fine by Labour Department, US Customs Detention,
windfall tax rumours, pretty much anything you can think of has been
thrown at the sector. The glove sector will survive just as they had
done so for the past 30 years. There is no fundamental or structural
change to the companies. It is because of negative headlines, local
funds who have met their KPI for the year and not taking positions to
support the sector, and retail investors who lack the confidence to
invest in the glove sector contributed to the weak share price
movement. When all these negativity blows over, local funds will have
to chase yields and returns, retail investors will become bold again,
the glove stocks are naturally the most attractive to keep in your
portfolio. Hopefully this help clear some of your doubts.
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Food for thought:
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https://www.tradeview.my/2020/12/tradeview-commentaries-glove-dilemma.html
