Temporary impact on earnings of glove makers
PETALING JAYA: The Malaysian glove sector is facing a triple whammy but this is a temporary situation for the sector in which demand continues to outstrip supply.
Major players Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd have initiated a full shutdown of their manufacturing facilities in Selangor amid the enforcement of the emergency movement control order (EMCO).
Analysts believe that while the impact on glove companies’ earnings will be temporary, investors’ sentiment on glove counters could be hit over the short term.
Maybank Investment Bank Research (Maybank IB) said the move by the glove players to shut down their facilities was surprising.“We are negatively surprised as gloves, which are personal protective equipment, constitute essential items and glove factories were allowed during the first lockdown last year.
“In our view, the temporary shutdown of glove factories will not only affect the companies’ earnings but could also jeopardise their relationships with overseas buyers, especially when the Malaysian glove makers are currently experiencing escalating competition from the China glove makers, ” it said in a report yesterday.
Due to escalating daily Covid-19 cases, certain districts in Selangor and select localities in Kuala Lumpur had been placed under the EMCO since July 3.
Assuming a two-week suspension of glove factories in Selangor under the EMCO, Maybank IB said it expects its financial year 2021 core net profit forecasts to decline by 7.4% for Top Glove and 16% for Kossan.
“As for Hartalega, our financial year 2022 net profit forecast could drop by 16% on the full shutdown.
While the impact on the glove companies’ earnings are still manageable and temporary, investor sentiment towards the glove counters would have been further eroded by the latest development.
“The sector is clouded by ongoing negative news such as declining average selling prices (ASP) due to intensifying competition among the new and existing glove players as well as environmental, social and governance risks.”
Assuming that glove plants do stay closed for the two-weeks EMCO period, TA Securities in a report said it expects Top Glove’s and Kossan’s 2021 earnings to be impacted by 4.5% and 4.7% respectively.
“Likewise, we expect Hartalega’s and Supermax’s 2022 earnings to be impacted by 3.9% and 3.5% respectively.
“Looking forward, we believe that the temporary halt in glove production in Selangor, coupled with the resurgent Covid-19 Delta variant in more than 80 countries, would increase the lead time for gloves and slow down the drop in ASP (currently dropping by 5% and 10% monthly) temporarily, given that 58% of all gloves produced in Malaysia are sourced from Selangor.”
UOB Kay Hian said the two-weeks’ downtime could impact earnings by up to 3%.
“The glove manufacturers were already running at a 70% utilisation rate under the lockdown. For now, all operations are fully suspended until informed otherwise by the authorities that have prioritised breaking the Covid-19 transmission chain.”
The research house added that the EMCO will have an impact on Top Glove, Hartalega, Kossan and Supermax, as their production footprint is primarily located in Klang, Selangor.
Meanwhile, AmInvestment Bank said post-pandemic demand projections are still overblown.
“We believe that the first post-pandemic year will see flattish to negative growth in glove demand, as opposed to steady growth projections by Frost & Sullivan and the Malaysian Rubber Glove Manufacturers Association (Marmga).
“This remains intact, as the expected fall in Covid-19 cases is postponed rather than cancelled.”
Marmga has predicted that there would be a shortage of some 80 billion pieces of gloves this year even as supply is expected to reach 420 billion pieces.