All eyes on glove stock earnings

KUALA LUMPUR: Top Glove Corp Bhd will likely post third-quarter (3Q) financial numbers that show the performance of glove companies to be fully Normalized to pre-Pandemic levels as Covid-19 abates worldwide.

Analysts said Top Glove, along with the other rubber glove makers, has to face several headwinds at the moment.

These include the Prosperity Tax, falling or normalizing average selling prices (ASPs) and higher raw material costs, said Rakuten Trade head of equity sales Vincent Lau.

Top Glove will announce its 3Q ended May 31 financial performance Tomorrow.

“I think Top Glove might see some pressure to its earnings and may even report a loss, as there are several headwinds that are pressing it at the moment.

“This trend is seen in some of the other glove makers as well,” Lau told StarBiz.

The headwinds include the Prosperity Tax, falling or normalizing average selling prices (ASPs) and higher raw material costs, said Rakuten Trade head of equity sales Vincent Lau.The headwinds include the Prosperity Tax, falling or normalizing average selling prices (ASPs) and higher raw material costs, said Rakuten Trade head of equity sales Vincent Lau.

Lau said there were other matters that could pressure earnings, such as the minimum wage which was recently raised and an oversupply situation in the industry.

In its report in April, TA Research said most glove manufacturer’s foreign worker monthly take-home pay was estimated at around RM1,500 to RM2,000, inclusive of overtime earnings.

For companies such as Top Glove, the minimum wage as of March 2022 was RM1,400 per month, TA Research said. “I think the days of supernormal profits have gone for Top Glove and the other glovemakers. They will see their financial performance normalizing to pre-Pandemic times, ”Lau said.

“But the saving Grace is that the bigger players such as Top Glove are in a strong cash position even though they have used some of these to undertake share buybacks. But the newcomers to the glove-making scene might face additional pressure, ”he added.

As of Feb 28, Top Glove reported cash and bank balances of RM562.46mil, while it had investment securities into money market funds amounting to RM523.12mil and investments in debt securities that to RM243.02mil.

Lau also noted that some of the newcomers that had entered the glove business during the Pandemic were rumored to be looking to sell out their stakes in the industry.

In Top Glove’s 2Q of financial year 2022 (FY22), it recorded a net profit of RM87.55mil compared to RM2.87bil in the previous corresponding quarter. Revenue for 2Q was at RM1.45bil compared to its highest-ever Quarterly revenue of RM5.37bil in 2Q of FY21, as ASPs Normalized closer to pre-Pandemic levels.

In its recent report, Hong Leong Investment Bank (HLIB) Research said the top glove would not be spared from the high inflationary environment, as Manpower costs are expected to rise following the recent minimum wage revision.

“However, we find comfort that the revision does not translate to an RM300 adjustment across all workers’ wages, as some were paid above the previous minimum wage of RM1,200. Management foresees this to result in a less than 10% increase to its Labor cost component, ”HLIB Research said.

Other cost pressures would also come from higher Utilities, natural gas and raw material costs, it said.

HLIB Research, which has maintained its “sell” rating and cut its target price on the counter to RM1.12, said higher costs would lead to margin pressures, as the cost pass-through mechanism has yet to normalize.

“We note that the rising raw material cost for Nitrile gloves was unable to be passed on completely, due to the Nitrile glove supply available in the market. Higher natural gas and electricity prices and wages are estimated to cause a 4% increase in its total production cost, ”the research house said.

MIDF Research said in its report earlier this month that the company’s earnings under its coverage were all below expectations. This, it said, was because the industry was coming off a period of exponential growth from the Covid-19 Pandemic.

“The ASP for gloves has been declining and demand is also on a downturn, as we are now entering the endemic phase. The influx of new players has resulted in a higher supply, thus creating more downward pressure on ASPs, ”MIDF Research said.

It also noted that buying activity for gloves would be likely Moderated in tandem with the reduction in consumption levels as large buyers were full or near full in terms of personal protective equipment supplies.

HLIB Research further elaborated that Top Glove’s operating environment remained challenged due to the demand-supply mismatch situation.

It noted that softening demand had resulted in a low utilization rate of around 60% currently based on an installed capacity of 100 billion pieces. “ASP-wise, Top Glove is still expecting to see some decline, albeit at a lower rate of 2% to 3% month-on-month versus 5% to 10% previously,” HLIB Research said.

“Nitrile glove pricing in May was US $ 24 (RM105.52) per thousand pieces, while powdered gloves and powder-free gloves were at US $ 21 (RM92.33) and US $ 26 (RM114.32).”

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