Investment Highlights

• We maintain our HOLD recommendation on Top Glove with an unchanged fair value (FV) of RM4.75/share. Our valuation is based on a PER of 20x on CY22F FD EPS, incorporating an ESG-adjusted discount of 3% for our rating of two stars.

• Yesterday, Top Glove hosted a briefing addressing US Customs and Border Protection (CBP) concerns and Top Glove’s progress towards improving workers’ living conditions.

• Here are the highlights:

1. Top Glove has engaged Impactt Ltd (Impactt), a UK-based ethical trade consultancy to assess and improve on the group’s fair labour practices by reference to the International Labour Organisation’s (ILO) 11 forced labour Indicators.

2. The group said that it has made significant improvements in several of its 11 forced labour indicators (Exhibit 1). Top Glove is actively requesting a Withhold Release Order (WRO) revocation by providing evidence to the CBP that it no longer engages in forced labour practices.

3. As for indicators, which are still unresolved, Top Glove has outlined its rectifying action plans (Exhibit 2). It aims to resolve its debt bondage issue by April 2021.

4. Additionally, in its efforts to comply with Act 446, the group has invested heavily on improving workers’ accommodation (Exhibit 3).

5. Glove ASP has fallen by 5% from 2QFY21’s levels. We estimate ASP to be US$75/1,000 gloves currently. This fall in price, attributable to a reduction in glove urgency, is in line with our assumptions. We do not believe that the resurgence in Covid-19 cases in countries such as Japan would reverse the drop as industry oversupply is expected to exert downward pressure on prices.

• We are still wary of falling glove average selling prices (ASP), economic effects of the WRO and the accompanying reputational risks. We believe that until the CBP lifts the sanction, Top Glove’s future outlook remains significantly uncertain. We thus maintain our FV for now.

Source: AmInvest Research - 9 Apr 2021