August 05, 2021

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The Glove Dilemma

I am quite hesitant to write another glove commentary as I believe that my earlier article on "Yield Will Protect Gloves Share Price From Falling Further" would have  ease investors' concern on the sector. Shortly after I wrote the article, Top Glove Chairman during the press conference mentioned Top Glove yield is expected to be more than 6% in FY 2021. Later on, a clarification statement to Bursa by Top Glove indicates the yield would be 8% based on Bloomberg consensus forecast in earnings and existing 50% dividend policy. This is in line with my forecast of Top Glove's yield and by extension it provides a good guesstimate of FY 2021 performance for the glove sector as a whole. Even recent Comfort Gloves results was unbelievable. 
 
After Top Glove conference, it attracted investors interest for awhile. Sadly, it was short lived as the share price for Top Glove stabilised before the issue of windfall tax was raised again by  politicians before the Minister of Finance closed the topic for good. As the glove stocks was finally showing some colour, the continuous Covid-19 case reports and subsequent Labour Department raid for Top Glove Ipoh dorms dampened sentiment further. This led to opening of an investigation paper when the law was said to only take effect next year under a new act by the Minister of Human Resource himself in the media.  
 
With all these avalanche of bad news impacting Top Glove, it would be very normal for the share price of glove stocks to be impacted and underperform. This negative sentiment will naturally spill over to other glove stocks for fear of similar kind of targeting by Ministry of Human Resource / Labour Department. If indeed Malaysia's Labour Law and Labour Department is fair and efficient in their inspection or enforcement, I believe this issue would not only be applicable to the Glove Sector but others such as Plantation, Construction. 
 
The glove stocks share price movement has nothing to do with trends, fundamentals or earnings performance anymore. It comes down to only 1 important factor -  Confidence. Investor Confidence, Consumer Confidence, Business Confidence are all key driving forces that moves the machinery of the economy forward. In the stock market, investor confidence is the most important. If there is no investor confidence, it is  hard for the share price to perform. Investor confidence is a qualitative factor that is tough to quantify via common financial analysis. 
 
I am by no means absolving Top Glove of their responsibility in providing a good accommodation, welfare and environment for their foreign labourers. Top Glove who always tout themselves as the world's largest glove manufacturer with 26% of world market share should have taken preemptive measures to ensure such problems are rooted out from their system in entirety. Top Glove not only represent the country's proud glove sector, they also put Malaysia on the map. This would be a painful but good learning experience for the company. I believe Top Glove will come out a better and stronger corporation after this string of incidents.
 
Most know that I am  believer in the glove story, as it has growth, fundamentals and importantly the scale of a global market to do well continuously. I have written many articles on the sector and although my top picks of the sector has always been Riverstone and Hartalega, I still deem Top Glove as a very sound company. In fact, I think companies like Sri Trang, Kossan, Supermax, Comfort, UG Healthcare are strong. Many regard the glove companies as "lucky" to benefit from a global pandemic. A prominent politician even call it "Durian Runtuh". I beg to differ. Luck is when preparation meets opportunity. The glove makers that survive from intense competition of over 300 players in a crowded sector in 1990s to only 45 world class players today is no mean feat. They did so through sheer grit, hard work and innovation with no direct subsidy or bail out from the Government of Malaysia. In addition, they contribute significantly to employment opportunities and tax revenue & levy to the company. Latex glove makers also help the dwindling rubber planters and Nitrile glove makers drew foreign investment like Great Britain's Synthomer to Malaysia. Even Petronas is venturing to Nitrile Butadiene (raw material for glove industry) seeing the huge potential in the industry. In a nutshell, the glove sector despite this period of negativity is a sector we as Malaysians should be very proud of. We have no FAANG corporations in our country, but we have these glove giants. 
 
So if you are in a dilemma whether to hold glove stocks, I just have this to say - "It cant get any worst than this". Vaccines, Covid-19 cluster, investigation / fine by Labour Department, US Customs Detention, windfall tax rumours, pretty much anything you can think of has been thrown at the sector. The glove sector will survive just as they had done so for the past 30 years. There is no fundamental or structural change to the companies. It is because of negative headlines, local funds who have met their KPI for the year and not taking  positions to support the sector, and retail investors who lack the confidence to invest in the glove sector contributed to the weak share price movement. When all these negativity blows over, local funds will have to chase yields and returns, retail investors will become bold again, the glove stocks are naturally the most attractive to keep in your portfolio. Hopefully this  help clear some of your doubts. 
 
Food for thought: 
 
 

 




 
 
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