MALAYSIA: Top Glove can mitigate higher labour costs

According to CIMB Research analyst Yeoh Yung-Juen, while the policy could cut Top Glove's
financial year 2013 net profit by up to 15%, its dominant capacity share and automation initiatives will mitigate higher labour costs.

"We believe Top Glove will not escape the minimum wage order as the law has been gazetted. However, its automation programme and dominant market share will help to soften the blow,” he said.

Also, he noted that since May when the minimum wage was first proposed, Top Glove's
management had been educating its customers about the higher production costs.

"Coupled with Malaysia's control over 50%-60% of the global glove supply, we believe the costs can be passed on.”

Yeoh maintained Top Glove's "neutral” call on grounds that its exposure to cost volatility would offset the recovery of glove demand.

Yeoh encouraged investors to stay invested in Top Glove "but not build propositions” because the group's profit margins are the lowest in the industry due to its competitive pricing.

"We maintain our earnings per share estimates but increase our target price after raising our price-to-earnings target to 14.15 times (from 13.05 times), still based on its two-year average,” he said, adding that for exposure to gloves, the research house preferred Hartalega Holdings Bhd.

CIMB noted that based on industry estimates, the minimum wage could raise labour costs in the country by RM500 per month per worker. For Top Glove, that would translate to an extra RM39 million annually payable to its 6,500 foreign workers.

Top Glove, which sought to defer the minimum wage implementation, has not received a response to its appeal but management is going ahead with plans to redesign its manufacturing sites to include more automation such as robotic arms to automate stripping, stacking and counting.

"This is expected to reduce foreign labour by about 25% and reduce foreign workers per factory from 400 to 300,” Yeoh said.

Source: Daily "The Star", Kuala Lumpur; 16 Nov 2012

(Syed Rashid Ali, Karachi, Pakistan)