• Top Glove held a briefing to provide an update and measures taken on additional verification required by US CBP.
• Out of 11 ILO’s forced labour indicators, 5 are outstanding and these are being comprehensively and expeditiously rectified with targeted submission of a completed report to CBP within a month’s time.
• Top Glove continuing to comply with Act 446 through ensuring proper and adequate workers accommodation.
• Top Glove is collaborating with Independent Migrant Worker Rights Specialist, Andy Hall on best possible ESG practices in the industry.
• We estimate the CBP issue could be resolved latest by 3Q21 and minimal impact in the short term as any loss in its US market could be partially offset by current strong demand from other countries.
• Maintain BUY with TP RM7.40 based on 18x PER pegged to CY22f EPS.

Status briefing on US CBP restriction

At yesterday's concall, Top Glove informed that subsequent to the Withhold Release Order (WRO) imposed on 15th July 2020 by the US Customs and Border Protection (CBP), it had engaged an independent consultant to assist the Group's ethical trade, human rights and fair labour practices in reference to the International Labour Organization's (ILO) Forced Labour indicators. The consultant has concluded that their findings do not amount to systematic forced labour. Nevertheless, CBP decided on 29 March 2021 to bar and confiscate products by Top Glove on evidence of forced labour issues. US CBP has since clarified that i) there are no new Forced Labour issues discovered and ii) requested for more verification and rectification of previous findings.

Progress of findings on ILO’s forced labour

In respect to the progress of findings on the 11 ILO’s forced labour indicators, 6 have been settled with 5 outstanding items (retention of identity documents, deception, debt bondage, physical & sexual violence and intimidation). These 5 outstanding are at the advanced stage of being rectified (table 1 & 2). As for the debt bondage issue, balance of 4 months remediation payment have been paid in lump sum to workers on 2nd April 2021. Management stressed that the additional rectification will be done in a comprehensive and expeditious manner targeting a complete report to CBP within a month's time.

Complying with Act 446 on workers accommodation

Top Glove reiterated its commitment towards continually improving its workers accommodation in accordance to the Act 446. It has provided its workers alternative accommodations in December 2020 with capex spent circa RM90m. Mid-term plans are to build and purchase new workers hostels with capex amounting to around RM195m to be spent during the period 2021-2023. To-date, the company has submitted 468 applications for Certificate for Accommodation (CFA) with 102 (22%) approvals. The approval and issuance of the CFA by the government is being done progressively.

Prioritizing ESG practices

Top Glove admitted that they are looking forward to collaborating with Independent Migrant Worker Rights Specialist, Andy Hall in an effort to become a leading manufacturer with the best possible ESG practices across the glove industry. Towards this end, Andy Hall acknowledges that Top glove has taken great strides in the advancement of migrant workers’ rights as well as in ESG initiatives. With Top Glove showing determination in this area, CBP should revaluate the entry restrictions placed on Top Glove products.

Minimal impact in the short term

Top Glove’s sales volume to US market accounts for c.22% of its total sales volume as at 1HFY21. Only products produced in Malaysia are temporarily affected but those made in China, Vietnam and Thailand can continue to be shipped to the US. Additionally, we believe in the short term, any loss from Malaysia’s production to the US market could be partially offset by strong demand from other countries, on the back of current shortage of gloves globally and recent rebound in number of global Covid-19 cases. We estimate the issue could be resolved latest by 3Q21 as we agree with TOPG’s assertion that they have taken this matter seriously and working expeditiously to address all the foreign labour issues.

Maintain BUY with TP RM7.40

Maintain forecast and BUY recommendation with TP RM7.40 based on PER of 18x on CY22f EPS. Top Glove’s share price has fallen by 44% from its peak in Oct 2020 and currently trading at an undemanding valuation FY21f/FY22f of PER 3.9x/10.5x respectively which we believe has somewhat reflected the negatives. We estimate Top Glove offer an attractive FY21f DPS of 93.8 sen (a payout of 67%), translating into dividend yield of 17.4%. Company net cash stood at RM4bn or 51 sen net cash/share as at 2QFY21.

Source: BIMB Securities Research - 9 Apr 2021