• Top Glove announced yesterday that on 15 July 2020, the US Customs and Border Protection (CBP) placed a detention order on disposable gloves manufactured by two of the company’s subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd.

• The group said that the reason may be related to foreign labour issues with regards to the retrospective payment of recruitment fees.

• Recall that the recruitment fees were paid by the workers prior to the implementation of the Zero Recruitment Fee Policy in January 2019. Top Glove is currently engaging with CBP to confirm the basis of the detention order.

• Top Glove estimates around RM20mil-RM50mil as the amount to be paid back to its workers. This is roughly 2-4% of FY20F estimated net earnings of RM1.3bil.

• The two subsidiaries listed under the detention list accounts for 50% of sales to the US, translating to roughly 12.5% of total group sales (total sales to the US were roughly 25% in FY19).

• The gloves under detention can be recalled to be sold to customers in other countries. The average selling price (ASP) in the US is estimated to be at a 5% premium compared with that in other countries while spot prices are similar with other countries. Considering the current demand conditions, it will still be profitable for the group if they choose to reroute the gloves.

• Top Glove is confident that the matter can be settled within 2-4 weeks. The group has engaged a consultant with experiences in dealing with similar issues.

• We are neutral on this news as we think that Top Glove will be able to solve the matter within a month. We believe that in the worst case scenario, the group will not face problems selling its gloves to customers in other countries due to the high demand during the Covid-19 pandemic.

• We maintain our BUY call with an FV of RM25.70 based on a PE of 33x CY21F EPS

Source: AmInvest Research - 17 Jul 2020