The US Customs and Border Protection have concluded that certain disposable gloves manufactured by Top Glove have been manufactured with the use of convict, forced or indentured labour. We understand that Top Glove are liaising with the CBP to obtain more clarity on this finding. We keep our forecasts unchanged pending further clarity on this issue. Note that since these allegations were made in mid-CY20, Top Glove has undertaken extensive remedial action. After tweaking our valuation methodology to reflect potential sentiment dent from this unfortunate news, our TP falls to RM7.00 from RM8.14 previously. Maintain BUY.

NEWSBREAK

On 15 July 2020, The US Customs and Border Protection (CBP) issued a withhold release order on disposable gloves manufactured by Top Glove. Through the investigation, the CBP have announced on 29 March 2021 they have determined that certain disposable gloves have been manufactured by Top Glove with the use of convict, forced or indentured labour.

HLIB’S VIEW

This news is an unfortunate negative as all goods found to have been produced by convict, forced or indentured labour will not be permitted to be imported by the US. Despite this, Top Glove are liaising with the CBP to obtain more clarity on this finding. Since allegations were made against Top Glove in mid-CY20, we understand Top Glove have taken extensive remedial action to improve their labour practices, including remediation payments to workers, blacklisting unethical recruitment agents, enhancing labour accommodations and ensuring workers are not tasked with excessive overtime. Furthermore, Top Glove have shared that an independent international consultant had concluded on 9 March 2021 that Top Glove’s actions “do not amount systematic forced labour”.

While this ruling may result in Top Glove being prohibited from exporting product to the US for the time being, note that Covid-19 cases rebounding recently may provide support for Top Glove’s sales (and share price) (Figure #1).

Forecast. While this news is undoubtedly negative, we understand Top Glove are in contact with the CBP to obtain more information on this finding. As such, we keep forecasts unchanged for the time being.

Maintain BUY, TP: RM7.00. With this news resulting in cloudier earnings certainty and negative investor sentiment, we tweak our valuation methodology accordingly. We value Top Glove with a PE multiple of 15x (from 18x previously) tagged to sustainable earnings in a post-supernormal earnings environment (FY23) summed with free cash flows generated during the boom period (both discounted back to PV). Furthermore, we tweak our discount rate to 9.2% from 8.7% previously (Figure #2). All in all, our TP falls from RM8.14 to RM7.00. Maintain BUY as we reckon the weak share price performance alongside undemanding valuations has somewhat reflected the negatives.

Source: Hong Leong Investment Bank Research - 5 Apr 2021