Investment Highlights

• We maintain our BUY call on Top Glove with an unchanged FV of RM6.52/share, based on DCF (at a discount rate equivalent to its WACC of 6.4% and a terminal growth rate of 2.5%). At our FV, the implied CY19F P/E is 26.4x.

• The Edge Financial Daily reported yesterday that the UK has launched a probe on Top Glove regarding an allegation of infringement of labour rights practices. This followed Thomson Reuters Foundation’s report that there was mistreatment towards Top Glove’s migrant workers.

• We are unperturbed by the latest development. We believe the company has adequately addressed the issues raised in its announcement to Bursa Malaysia last night:

1. High recruitment fees imposed on foreign workers. Top Glove has no involvement with the recruitment costs that are charged by foreign agents to the workers at the source country. The processing costs in Malaysia (i.e., levy, visa stamping, medical examination) are fully borne by the company and not passed down to workers. To mitigate the issue of high recruitment fees, Top Glove plans to engage with the embassies of the labour source countries and request for their urgent action.

2. Excessive overtime. Top Glove does not practise forced overtime (OT). The management is continuously putting in measures to prevent OT of more than 104 hours per month and these are expected to be fully implemented by the end of Dec 2018. Moreover, the company is constantly investing in more automation in its plants to reduce dependency on manual labour.

3. Poor working and/or living conditions. Top Glove provides its workers with accommodation that is equipped with the necessary amenities. Full plant equipment (i.e., gloves, ear plugs, helmets, etc.) are also provided in addition to transport to and from the workplace.

• Presently, Top Glove has some 13,000 foreign workers under its employment which make up almost 80% of their total labour force. The company pays the foreign labour at least the minimum wage of RM1,000, excluding additional allowance and overtime pay. We believe the implementation of the new measures to prevent illegal OT hours will ease the concerns any stakeholders might have with regards to the legality of its labour practises.
• In any case, the UK is a small market for Top Glove, contributing to only 2-3% of its FY17 turnover. We understand that Top Glove has complied with the requirement for a third-party certification for sales to Europe which involves the engagement between the buyers and external auditors to ensure that the product meets certain environmental, social and governance (ESG) standards.

• We continue to like Top Glove for: (1) its expansionary plans; (2) focus and continual efforts in improving quality and operational efficiency; and (3) its position as the largest rubber glove manufacturer.

Source: AmInvest Research - 11 Dec 2018