TopGlove: Week 18 (30 April-4 May) Stock Picks Commentary

Stock Picks #5

Top Glove Corporation Berhad (TOPGLOV)

Week Low: RM 4.48 (Down 21 sen – 4.5%)

"To recap last week, Maybank Research in its analyst report on 24 April upgraded TopGlove Corp from "SELL" to "BUY" raising its target price to RM 5.40 stating that TopGlove sales volume picked up in its latest quarter to almost back to its H1N1 peak as well as its key production cost (latex cost) has begun its seasonal downtrend.

Market took this news as positive as higher sales and lower production costs are expected to be beneficial to TopGlove's net profits in the coming months. TOPGLOV stock rose 5.6% since 24 April to week’s highest RM 4.72 on 25 April."

Click here for last week's commentary on TopGlove

Subsequently (this week), on 1 May, the Malaysian Government announced minimum wage to set at RM 900 and to be effective 6 months from date the Minimum Wage Order is gazetted.

Maybank Research stated in their earlier analyst report that they have not imputed for any minimum wage hikes in their model, citing TopGlove’s 5,500 unskilled workers being paid approximately RM 600/month but TopGlove is in the midst of installing more robotic arms at its nitrile plants to reduce its labour requirement.

Hwang DBS Vickers Research stated that Top Glove will be most affected by minimum wage policy and its earnings and margins are expected to be dampened in the immediate term.

HwangDBS said its sensitivity analysis showed earnings could fall by 5%-19%, if minimum wage of RM900 per month is implemented assuming no change in average selling prices. Nonetheless, HwangDBS expects additional staff costs to be passed to customers over time.

Market reacted negatively on potentially lower profit margins from the minimum wage policy even though it will only be effective only 6 months from the date the Minimum Wage Order is gazetted.

Take note that the government has also provided some flexibility whereby some allowances or fixed cash payments are allowed to be absorbed in the calculation for minimum wage. Furthermore, if Top Glove is able to pass through the staff costs increase by raising average selling prices, then the impact may be reduced.

TOPGLOV stock dropped 4.5% (21 sen) since 2 May to week’s lowest RM 4.48 on 3 May and closed at RM 4.55 for the week.

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