Total lockdown to cut glove production


THE latest round of the Movement Control Order (MCO) is expected to slash glove companies’ production volume, but pricing could increase due to global supply shortage.

CGS-CIMB Securities Sdn Bhd analyst Walter Aw said the 60% workforce requirement under the new MCO would likely lead to lower glove production output during the period.

“However, we believe glovemakers will be able to mitigate the situation by allowing essential staff to be utilised at processes that are more manual labour-intensive, such as packing and stripping.

“We believe glovemakers may take this opportunity to perform maintenance work on existing production lines. This will allow glove companies to ramp up production once MCO is over,” Aw stated in a sectorial report yesterday.

The analyst said the MCO implementation would delay glovemakers’ expansion plans.

The broker expects sector capacity to rise by 18.8% to 227 billion pieces per annum by the end of calendar year 2021 forecast (CY21F) for glove companies under its coverage.

CGS-CIMB remained neutral on the matter, citing delays in expansion plans may lead to lower than expected production output against its current forecast.

They will be mitigated by a slower decline in average selling prices (ASPs), driven by global supply shortages.

“For every two weeks that this round of MCO is in place, we estimate our sector’s CY21 revenue forecast will decline by 1.5%, while net profit forecast will decline by 2.4%, assuming ceteris paribus (all other things being equal), including our ASP estimates for the sector.”

CGS-CIMB reiterated its ‘Overweight’ call on the glove sector with Hartalega Holdings Bhd and Kossan Rubber Industries Bhd as its top pick despite having the view that ASPs and earnings will peak in CY21F. The sector’s CY21F-CY22F dividend yields of 5.1%-14.6% remain attractive.

Potential rerating catalysts are higher than expected increase in ASPs and stronger than expected demand for gloves.

Aw said downside risks include another Covid-19 outbreak among workers of glove companies under CGS-CIMB coverage that would lead to production disruption, a sharp decline in ASPs and further spikes in raw material prices.

Most glove stocks’ share prices closed lower yesterday.

Hartalega ended 2.17% lower at RM9, Kossan at RM4.05 (-1.46%), Supermax Corp Bhd at RM4.13 (-2.59%), Careplus Group Bhd at RM2.14 (-1.83%) and Comfort Gloves Bhd at RM2.14 (-2.28%).

Top Glove Corp Bhd (RM5.18, +1.77%) and Rubberex Corp (M) Bhd (RM1.16, +0.87%) bucked the trend.

In a separate statement, Supermax said it has taken concrete steps and is resolute in ensuring the rights of its workers are respected and protected.

The group said it upholds local and international labour standards, and is fully compliant with environmental, social and governance practices.

On Saturday, it was reported that US Customs and Border Protection (CBP) was investigating Malaysian glovemakers Hartalega and a Supermax’s unit.

The CBP, however, reportedly said it does not comment on whether specific entities are under investigation.

Supermax said it abides by labour laws and regulations on the recruitment of migrant workers.