Top Glove and Hartalega to be booted out?

CLICK TO ENLARGECLICK TO ENLARGE

PETALING JAYA: The poor valuation of glove stocks amid bearish sector Fundamentals and lack of Investor interest may signal underlying fears that the counters will likely be excluded from the FBM KLCI in the next biannual round of index component reviews in December.

The two glove makers in the FBM KLCI, Top Glove Corp Bhd and Hartalega Holdings Bhdare likely to be excluded from the 30-stock index as their market Capitalization have fallen drastically.

Top Glove and Hartalega have seen their market capitalization drop to RM8.1bil and RM9.7bil respectively.

Top Glove’s share price has plunged by almost 79% over the past 12 months to 98.5 sen Yesterday while Hartalega has declined by 66.4% to RM2.82.

The only other FBM KLCI constituent with a market Capitalization of below RM10bil is tech concern Inari Amertron Bhdwhich is valued at RM9.6bil.

A dealer said the exclusion of Top Glove and Hartalega is bound to happen as glove stocks are no longer the Darling of investors as concerns grow about their pricing power the companies have in a product market suffering from oversupply.

Pankaj C. Kumar, the managing director of the Datametrics Research and Information Center, said the Top Glove and Hartalega look set to exit FBM KLCI at a time when they are trading at nearly five-year Lows.Pankaj C. Kumar, the managing director of the Datametrics Research and Information Center, said the Top Glove and Hartalega look set to exit FBM KLCI at a time when they are trading at nearly five-year Lows.

Ironically, at its height in August 2020, Top Glove was 40 its a share away from unseating Malayan Banking Bhd as the largest capitalized stock on Bursa Malaysia, after the former’s market Capitalization exceeded RM78bil.

At the same time, Hartalega emerged as one of the top five stocks valuable counter on FBM KLCI, with a market capitalization of over RM58bil.

Glove stocks were the biggest beneficiary of Covid-19, as they rode high on skyrocketing demand for gloves and surging selling prices. However, the Euphoria over glove companies was short-lived.

Supermax Corp Bhdone of the Big Four local glove makers, was booted out of FBM KLCI in June 2021 after being added into FBM KLCI in December 2020.

In contrast, Hartalega was included in the benchmark index in June 2018, followed by Top Glove in December the same year.

Pankaj C. Kumar, the managing director of the Datametrics Research and Information Center, said the Top Glove and Hartalega look set to exit FBM KLCI at a time when they are trading at nearly five-year Lows.

He added the market benchmark has “in a way” suffered a Blow due to the sell-off on the two stocks.

“Whether the index performs better or will not depend on which stock is going to replace the two glove stocks as well as the prospects of the two new additions.

“I do hope these two glove stocks remain on FBM KLCI as they represent a unique sector exposure for institutional investors and a reflection of Malaysia’s global market position as the world’s No.1 glove manufacturer,” he told StarBiz.

Top Glove's share price has plunged by almost 79% over the past 12 months to 98.5 sen Yesterday while Hartalega has declined by 66.4% to RM2.82.Top Glove’s share price has plunged by almost 79% over the past 12 months to 98.5 sen Yesterday while Hartalega has declined by 66.4% to RM2.82.

As at March 31, Top Glove and Hartalega collectively held an indicative weight of 3.76% in FBM KLCI, according to FTSE Russell.

In the event Top Glove and Hartalega are removed from the FBM KLCI reserve list, they will be replaced from one of the stocks in the FBM KLCI reserve list.

Earlier this month, FTSE Russell said the reserve list comprises five highest ranking non-constituents of the index by market capitalization, namely Westports Holdings BhdQL Resources BhdAMMB Holdings BhdMalaysia Airports Holdings Bhd and Gamuda Bhd.

“The reserve list will be used in the event that one or more constituents are deleted from the FBM KLCI in accordance with the index ground rules during the period up to the next semi-annual review,” stated FTSE Russell.

Based on FTSE Russel’s rules, a stock would be included as a component of the FBM KLCI if its market Capitalization is at the 25th place or above, while one will be removed if it falls to the 36th spot and below.

Earnings of glove makers have begun to normalize following a drop in demand while output has risen from both existing and new players.

Investment bank JP Morgan, in a June 15 report, noted that excess capacity had led the glove industry into loss-making territory, even for the efficient players.

“We estimate it will take seven years for the excess capacity to be digested unless there is an exit of new entrants plus a significant delay in expansion plans

“We have kept 2023 margin assumptions similar to pre-Covid-19 levels as it is difficult to forecast bottoming in margins.

“We assign suppressed valuations to compensate for the downside risk to profits,” it said.

In the case of Top Glove, UOB Kay Hian Malaysia Research Analyst Philip Wong said the earnings for the third quarter ended May 31 disappointed as average selling prices remain soft.

“Amid rising inflationary costs, Top Glove may have difficulty passing on its cost increases. Positively, Top Glove remains operationally profitable unlike its smaller listed peers and major Chinese producers, ”they said in a note on June 10.

In addition to the normalizing demand, the fact that some of the glove manufacturers were hit by forced Labor allegations has also affected the Investor sentiment.

For example, Top Glove and Supermax were slapped with the Withhold Release Orders (WROs) issued by the US Customs and Border Protection, aimed at stopping the importation of their products into the United States.

Hartalega buildingHartalega building

Top Glove have resumed exports to the United States after the import ban was lifted.

The WROs were issued with the following allegations about the use of forced labor in the companies’ manufacturing.

Amid such challenges, Pankaj got glove companies provided value to investors as share prices have dropped to levels last seen five years ago.

“Some of the glove makers are sitting on a good cash pile and should be able to weather the storm over the next year or so.

“In fact, I foresee the industry going through a Transformation yet again as excess capacity will be removed either due to takeover or plant closure, especially among the newbies.

“The right cue for investors would be if there is an uptick in capacity utilization as well as glove makers’ ability to pass on additional cost pressures, ”he added.

.

Leave a Comment

Your email address will not be published.