WRO has negative impact on Top Glove's sales, earnings in North America — analysts

TheEdge Fri, Apr 09, 2021 03:02pm - 3 weeks ago

KUALA LUMPUR (April 9): The United States' Withhold Release Order (WRO) on Top Glove Corp Bhd is expected to have a negative impact on the rubber glove manufacturer's sales in the North American markets, MIDF Research said.

However, it believes Top Glove would be able to relocate the supply to other markets that are experiencing a resurgence in Covid-19 cases.

"Its factories outside of Malaysia will still be able to export to the US. As such, we do not expect the WRO to have a significant impact on Top Gloves' sales and earnings," it said in a note today.

It noted Top Glove recently said its rubber gloves' average selling price (ASP) would be adjusted by about 5% to match the current market prices.

MIDF opines that the reduction in sales to the US may have a slight negative impact on its ASP due to the higher ASPs in the region.

"That said, we believe that the diversion of trades to other markets will cushion the impact.

"Moreover, its production capacity was capped by the halt in operations previously. Hence, the higher volume produced is likely to offset the impact in ASP adjustment," it said.

Yesterday, Top Glove held a briefing to provide and update on the improvement it had made based on the findings of the International Labour Organization's forced labour indicators.

It said it would continue to rectify existing issues so that the US Customs and Border Protection (CBP) would modify or revoke the WRO.

Of the 11 findings, six have been resolved, and the company is looking to resolve the debt bondage issue as it paid out the final tranche of the remediation fees to its foreign workers earlier this month.

As such, MIDF maintains its "buy" call on the company, with an unchanged target price of RM8.29.

Similarly, Kenanga Research, which sets an "outperform" call on the company, said Top Glove's ASP is expected to soften, albeit at a slower pace on the back of still robust demand.

"In the second quarter of financial year 2021's results briefing, the group highlighted that nitrile gloves' ASP was expected to decline by between 3% and 5% month-on-month or adjusted down to be in line with peers.

"Management was of the view that the ASP was unlikely to fall off a cliff despite average lead time being reduced from 300 days in early January 2021 to 170 days currently, compared with 20-30 days pre-Covid-19," it said.

Kenanga Research said post-Covid-19, the inventory restocking cycle is expected to spur demand, coupled with increased usage arising from new users and increased hygiene awareness.

"We still see significant value being derived from Malaysian glove players, which command 65%-68% of global market share. Downside risk to our call is lower-than-expected ASP in the second half of 2021," it said.

Meanwhile, AmInvestment Bank maintains a "hold" call on the company, as it is still wary of falling glove ASPs, impact from the WRO, and the accompanying reputational risks.

"We believe that until the CBP lifts the sanction, Top Glove's future outlook remains significantly uncertain," it said.

At 11.57am, Top Glove's shares fell 14 sen to RM5.26, with 21.26 million shares transacted.

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