Windfall tax risk sees gloves under some pressure

Maybank Investment Bank Research said the supernormal profits being generated by the gloves sector and the government’s extremely challenging fiscal outlook raises the risk of windfall taxes being imposed on the gloves sector.

KUALA LUMPUR: Windfall tax risk for glove makers after their supernormal profits and surge in share prices saw investors take some money off the table.

At 9.41am, the FBM KLCI was down 9.88 points to 1,554.71. Turnover was 1.74 billion shares valued at RM1.07bil. The broader market was weaker with 538 losers to 235 gainers and 338 counters unchanged.

At Bursa, Top Glove fell RM1.72 to RM22.10, Hartalega RM1.56 to RM14.46, Supermax RM1.54 to to RM16.38 and Kossan RM1.40 to RM13.

Maybank Investment Bank Research said the supernormal profits being generated by the gloves sector and the government’s extremely challenging fiscal outlook raises the risk of windfall taxes being imposed on the gloves sector.

“The imposition of windfall taxes is not without precedent, being most recently raised by the government in 2008. In fact, there is a specific legal act governing windfall tax application per the Windfall Profit Levy Act 1998, which allows the Minister of Finance to submit a levy order to Parliament for approval within 120 days, ” it said.

Maybank IB Research said in the case of the gloves sector, a stumbling block for the government in terms of imposing a windfall tax would be the lack of a clear product price benchmark (i.e. unlike CPO, where there is a transparent single CPO product price, gloves have multiple product grades and widely-varying average selling prices or ASPs) or return on capital gauge (such as ROA for the IPPs).

On the other hand, the glove companies are all family-owned (moderating political and investment climate repercussions/ ramifications) and do not pose a direct negative implication for the broader capital markets in a way the IPP bonds did.

“In our view, should the government wish to proceed with a windfall tax levy on the gloves sector (with proceeds to be used for Covid-19 containment and economic support measures), a temporary hike in the corporate tax rate covering the forecast peak-pandemic supernormal profit period (expected to be 2020-2022) would be the most straightforward and transparent structure given the operating/ pricing complexities of the underlying business.

Maybank IB Research said a 10 percentage point increase in the corporate tax rate (i.e. to 34%) applied to the three glove stocks under coverage (Top Glove, Hartalega and Kossan) would raise an average of RM1bil per annum for the government over the three years of 2020-2022.

“Given these three stocks are 70% of the domestic gloves sector capacity, extrapolating to the whole sector would increase average tax revenue take for the government from the windfall levy to RM1.4bil per annum (peaking in 2021 at c.RM2.2bil), ” it said.