Virus surge threatens manufacturers’ earnings

The rising number of factory worker clusters is expected to disrupt production, says analyst


THE recent surge in Covid-19 cases among factory workers has put the manufacturing sector’s recovery prospect under threat, with analysts maintaining a cautious outlook.

JF Apex Securities Bhd head of research Lee Chung Cheng said the rising number of factory worker clusters is expected to disrupt production as manufacturers will be short on labour.

He said next year’s forecast brings a mixed bag of cautious optimism with manufacturers facing rising compliance costs for observing the standard operating procedures.

“Manufacturing companies need to observe the Worker’s Minimum Standards of Housing and Amenities Act 1990 (Act 446) and bear the costs of undertaking the swab tests.

“However, at the same time, industry players will continue to see improvement in export sales underpinned by global economic recovery, especially in the US and China,” he told The Malaysian Reserve.

Sector-wise, Lee expects industries that rely heavily on foreign workers, such as manufacturing, construction and plantation, to be affected.

“Conversely, this could also bring new opportunities to companies like AME Elite Consortium Bhd, which is involved in dormitory business, with tighter regulations on worker accommodation,” he added.

The Department of Labour of Peninsular Malaysia earlier this month announced it would take legal action against several companies, including the world’s largest glove manufacturer Top Glove Corp Bhd, over employee accommodation issues.

Over 6,000 cases have been identified under the Top Glove-linked Teratai cluster, making it the country’s biggest Covid-19 group.

Rival glovemakers Hartalega Holdings Bhd and Kossan Rubber Industries Bhd also confirmed their employees have tested positive for the virus.

Hartalega on Dec 14 said 35 of its employees tested positive for Covid-19, 20 of them were at the Bestari Jaya operations and 15 at the Next Generation Integrated Glove Manufacturing Complex in Sepang, Selangor.

Kossan detected an additional 563 positive Covid-19 cases on Dec 21, after 427 tested positive on Dec 16, forcing its affected plant to remain closed until Dec 30.

RHB Investment Bank Bhd cut Kossan’s target price (TP) to RM7.90 from RM9 on the back of the high number of Covid-19 cases.

RHB Investment analyst Alan Lim said Kossan’s discounted cashflow-derived equity value per share has been reduced to RM8.78, to which he ascribed a 10% environmental, social, and corporate governance-related discount.

Lim said the earning forecast for Kossan for the financial year ending Dec 31, 2020 (FY20) has been reduced by 2% to RM1.15 billion.

“We estimate circa 2% of total annual output volume to be impacted, and 25% of its capacity is affected for three to four weeks. This works out to be around 1.7% of the total annual output.

“We maintain our FY21-FY22 earnings estimates as we expect the operation to resume progressively from Dec 31 onwards,” he said in a recent note. Lim maintained his ‘Buy’ recommendation for Kossan on a sector positive outlook and valuation.

“The average selling price (ASP) of gloves is still rising and we expect this trend to continue throughout 2021. We believe the selling on Kossan shares is overdone,” he said, adding that the sector outlook remains positive.

Lim expects the uptrend in ASP for gloves to continue in 2021, given the shortage of nitrile butadiene rubber and a glove deficit of 7.4 billion pieces.

Pecca Group Bhd also announced on Dec 22 that 246 out of its 597 employees tested positive for Covid-19 after group-wide testing was conducted on all employees.

In a recent statement, the group said the swab tests, quarantine measures and disinfection processes cost an estimated RM500,000.

The impact of the seven-day production closure is expected to be limited to less than 5% of the group’s revenue in FY21 ending June 30, 2021.

Hong Leong Investment Bank Bhd analyst Daniel Wong expects the positive Covid-19 cases to affect the group’s operations in the short term due to production suspension and risk of limitation on production capacity once operations resume.

“The group may need to incur higher production cost for an increase in shifts or overtime to catch up on the temporary loss of production to meet the current high demand, especially for Perusahaan Otomobil Kedua Sdn Bhd’s production.

“Furthermore, we estimate the impact from the loss of earnings, and cost of testing for group-wide employees and sanitisation works could be about RM1 million to RM1.5 million,” he said in a note.

Wong cut his earnings forecast for Pecca for FY21 by 5.1% to RM23.7 million and maintained his FY22 and FY23 earnings forecasts.

He maintained a ‘Buy’ recommendation for Pecca with a lower TP of RM1.68 from RM1.75 based on a price-earnings ratio of 12 times 2021 profit.