This article first appeared in The Edge Malaysia Weekly on November 30, 2020 - December 6, 2020
TWO emojis represent Top Glove Corp’s experience over the past weeks: thumbs up and thumbs down. Ironically, both circumstances are because of Covid-19.
In the financial year ended Aug 31, 2020 (FY2020), so strong was demand for rubber gloves that the world’s largest glove maker delivered earnings of RM1.29 billion in the final three months — a record quarter — to boost full-year earnings to RM1.87 billion. Its share price enjoyed a corresponding boost.
Soon after, Covid-19 hit home. The Teratai Covid-19 workplace cluster, which consists largely of Top Glove workers in Klang as well those from factories of other companies in other areas in Selangor, reached a total of 4,093 positive cases as at last Thursday, out of 6,526 that had been tested since Nov 2.
An estimated 3,000 of those 4,093 positive cases were Top Glove workers.
As a result, 20 of the company’s factories in Meru have had to temporarily stop production, while another eight are operating at only 10% to 20% capacity. The 28 affected facilities in Meru represent about half of Top Glove’s total production capacity.
Meanwhile, its work dormitories in Klang and surrounding areas were placed under an Enhanced Movement Control Order (EMCO) from Nov 17 to 30.
Since the beginning of the month, Top Glove shares have declined 17%, with some RM11 billion in market capitalisation wiped out.
To add to its misery, Human Resources Minister Datuk Seri M Saravanan was recently quoted by The Star as saying that checks of Top Glove’s factories to date have revealed “deplorable” conditions at its workers’ housing. Saravanan also said that the Labour Department would be investigating conditions at Top Glove’s factories.
Saravanan appears to have changed his tune after defending Top Glove in July when he said allegations by the US Customs and Border Protection (CBP) of forced labour at the company’s factories were baseless. The allegations led to an import ban on two of Top Glove’s subsidiaries — Top Glove Sdn Bhd and TG Medical Sdn Bhd — by the CBP on July 15.
Responding to Saravanan’s recent remarks, Top Glove managing director Datuk Lee Kim Meow said: “Since the minister’s last visit three months ago, [the living] conditions of our workers have improved. That is because we have continued to put in a lot of money to improve the facilities and we wanted to do it quickly, so it came as a big surprise when such comments were made.
“We need to clarify with the ministry to see what are the areas that we did not do correctly, and how can we improve further.”
He also told a media conference last week that the company had spent about RM20 million on 100 units of new apartments for its workers in Meru.
“We have invested and bought more apartments, and we have moved workers from overcrowded apartments to these new apartments. We are complying with the Workers’ Minimum Standards of Housing and Amenities (Amendment) Act 2019,” added Top Glove executive chairman Tan Sri Dr Lim Wee Chai.
In addition, the group will need to bear upfront Covid-19 testing costs for its workers, but will be allowed to claim a subsidy of RM150 for each screening for workers who contribute to Socso (Social Security Organisation).
On top of that, it has to bear the costs of hotel expenses for workers who have been discharged from hospital but are not allowed to return to their accommodation in Meru, as no one is permitted to enter the area until the EMCO is lifted.
Despite the setbacks, Top Glove estimates the temporary shutdowns would only reduce its FY2021 sales revenue by about 3%. The figure was derived after taking into account an expected EMCO of three weeks, and the expectation that 50% of production would be impacted.
“A year has 52 weeks and a two-week 50% impact on production means one week’s worth of (full production halt) impact. One week out of 52 weeks is only 2% (out of total revenue for the year). So, (three weeks of EMCO) is 3% — that is how we estimate,” Lim said.
The group does not anticipate any major cancellations of orders because of the temporary shutdowns. However, orders will likely be subject to a delay of two weeks.
“The delivery will be affected by the period that we have reduced our operations, but thankfully Top Glove has many other factories in other locations [in Malaysia], as well as in Thailand, Vietnam and China. Basically, we will have to inform our customers there will be a slight delay in their shipments,” Lee explained, adding the CBP had been informed of the temporary shutdown of its facilities in Meru.
“They understand that we are going through a difficult patch, and they also continue to work with us closely to see what is the best thing to do. In this regard, the CBP has been very professional and very fast in responding to us. We will continue to engage them, and let them know that we have done over and above what their requirements are.”
Aggressive share buybacks have also put Top Glove under the spotlight. Since September, the glove maker has spent RM1.14 billion — more than half its FY2020 earnings — repurchasing its shares.
The group’s latest purchase last Thursday raised its cumulative net outstanding treasury shares to 157.03 million, which is equivalent to a 1.92% stake.
Lim said that management believes the share buybacks make for “good practice”.
“The reason for the share buyback is because we know that the company will continue to do well, especially in FY2021. The management views that the price [of the buybacks] makes it a good buy.
“The most important thing is that we have enough cash [to do so]. We have net cash of about RM2 billion. We learn from successful big companies like Apple Inc and Alphabet Inc in the US, which are also cash rich and conduct share buybacks.”
Lim also said the group’s estimated dividend yield was expected to exceed 6% for FY2021. Later, in a filing to Bursa Malaysia, Top Glove clarified that according to the company’s dividend policy of 50% payout ratio on net profit after minority interest, and based on the Bloomberg consensus FY2021 net profit of RM8.61 billion, the expected dividend per share would amount to 53 sen.
“With the company’s mid-day share price as at Nov 25 of RM6.66, the dividend yield would be about 8%, which is above the 6% [mentioned]. The company wishes to clarify that it has not decided on the quantum of the dividend for FY2021.”
Most analysts say Top Glove still warrants a “buy” call. Fifteen out of 19 analysts surveyed by Bloomberg have a “buy”, “add” or “outperform’ call on the stock.
Hong Leong Investment Bank Research maintained its “buy” call, but lowered its target price on the stock from RM10.95 to RM10.38, as the brokerage cut its estimates for FY2021 earnings by 5.6% to reflect the temporary disruption following the closure of the factories — prudently assuming a one-month closure for the affected factories.
AmInvestment Bank did not make any changes to its earnings forecasts, but said that it would monitor the situation closely to assess the total loss and adjust its numbers accordingly once the official numbers were announced. It maintained its “hold” call with an unchanged fair value of RM7.88.
A fund manager who declines to be named observes: “For some of the ESG (environmental, social and governance) funds, I think they will avoid Top Glove for now due to the labour issues.”
However, he said “generic investors” would look at whether Top Glove was likely to deliver to their expectations. “Personally, I feel they will. Over the next two to three quarters, they can still surprise investors with their income. As long as income is sustainable and they are committed to improving their ESG practices and corporate social responsibility, I think investors will continue to accumulate the stock.”
Top Glove’s shares closed at RM6.99 last Friday, which translates into a market capitalisation of RM56.2 billion.
With the temporary shutdown of factories due to the Covid-19 outbreak among their staff, Malaysia’s industrial production index (IPI) is expected to decline 4% to 5% this year, say economists.
“The sharp rise in new Covid-19 cases is certainly a cause for concern. In particular when key sectors such as rubber gloves have been one of the main casualties — one of the main players saw a big jump in new daily infection cases among its workers,” Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid tells The Edge.
“This has resulted in them operating at a reduced capacity and adhering to very strict standard operating procedures. If a similar situation affects other subsectors of the manufacturing industry such as electrical and electronics, the chemical industry, food and beverage and so on, that would have a severe impact on the IPI.”
Afzanizam is projecting a 5% decline in overall IPI this year. Asked if he had revised his projections downwards because of the recent factory shutdowns, Afzanizam replies in the negative as he says there has been only one major shutdown so far. As such, the problem is not a systemic one and does not warrant a downgrade in IPI.
Meanwhile, Sunway University economics professor Dr Yeah Kim Leng also believes that the temporary factory shutdowns will have a minimal impact on IPI. He notes that the manufacturing IPI, which contributes nearly 70% to the overall IPI (with the other two indices being mining and electricity), improved to 4.3% year on year (y-o-y) in September after softening to 2.2% the previous month.
“Owing to the sharp contraction of 37.2% in April and 22.6% in May, when the nationwide Conditional Movement Control Order (CMCO) was in force, manufacturing output for the first nine months remained negative at -4.5%. With the localised CMCO affecting industrial areas and some factories being closed due to virus infections, the pace of manufacturing IPI uptrend is expected to soften but not turn negative, as most manufacturing facilities continue to operate normally,” says Yeah.
In the first nine months of the year, the IPI experienced a y-o-y contraction of 5.6%.
“The full year is projected to decline 4%, given a more subdued recovery in manufacturing output and softer domestic and external demand arising from the virus resurgence in Malaysia and in key trading partners in the US and Europe,” says Yeah.
Covid-19 has put a dampener on manufacturing activities as businesses have had to halt operations to conduct thorough testing of workers and sanitisation of premises due to the outbreaks at the facilities.
Top Glove Corp Bhd has seen 20 of its factories in Meru temporarily stop production while the remaining eight have been operating at reduced capacity because of the Covid-19 outbreak among its workers. Other manufacturers affected include Ipoh-based electronics manufacturer Salutica Bhd, Senawang-based glove maker Careplus Group Bhd and automotive leather seat manufacturer Pecca Group Bhd.
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