It was reported in a local publication that migrant worker activist Andy Hall (AH) has withdrawn his voluntary engagement with the company (VS), citing the latter’s failure to honor previous commitments made publicly to Bursa Malaysia and having unilaterally appointed an auditor to conduct an independent third-party social compliance without consulting him, amongst others. Share price has taken a beating, with investor sentiment shaken. Management addressed the concerns via a virtual conference call yesterday, with detailed explanations on what had transpired, though also commenting that they remain on cordial terms with Andy Hall. Of greater importance to us however is that the Group’s key clients remain engaged on these matters, to which management has affirmed that they are and that these remain as non-issues. Negative sentiment notwithstanding, we continue to like the Group’s long-term growth prospects and reiterate our Outperform call. We trim our target price to RM1.40 however (RM1.86 previously) as we cut multiples to 15x (20x previously) in line with its long-term average to also reflect the higher risk premium. This is underpinned by its forward 3-year CAGR of 15%.
- AH’s grouses. VS has unilaterally appointed an auditor to conduct an independent third-party social compliance audit (concerning its irregular workers situation) without consulting him. VS has failed to honor its previous commitments made publicly to Bursa Malaysia, apparently in relation to the full audit findings not being shared with him. VS is only providing limited information on the audit methodology. In addition, VS has stated that the audit will take 3-4 months and will include local workers, to which he does not see the necessity to considering that the alleged forced labor situation only involves foreign workers.
- VS’ response. Two names had been proposed, one each by VS and AH, to which the former’s Board decided on PwC Consulting Associates. The scope of audit had been expanded to also include local workers as VS contends that forced labor also applies to local workers so as long as there are elements of alleged ill-treatment. Given that the audit could potentially contain sensitive client-related information, it was requested that AH sign a non-disclosure agreement, to which we are made to understand he refused – hence the full audit findings not being able to be shared.
- Our thoughts. Both sides have merits to their arguments – one that appears to be based on broken promises, and the other based on a need to get a “clean bill of health” hence it doing whatever deemed necessary for its own good. Concerns, understandably, are overwhelming seeing as that a peer had its key customer cutting off ties (albeit with a 6-month grace period) and causing a significant drop in earnings (and resulting market capitalization) despite constant assuages that “all was well, and under control”. We expect that management of VS would have learned from that experience and will do the necessary to ensure it is not exposed to such potential eventualities. We see significant share price weakness as opportune timing for accumulation.
Source: PublicInvest Research - 4 Mar 2022