What’s new

• Top Glove has conducted a virtual briefing, updating the recent withhold order released from U.S. Customs and Border Protection (CBP) on their disposable gloves, latest worker accommodations improvement as well as glove market outlook. The briefing also included presentation from Mr Andy Hall, Independent Migrant Worker Rights Specialist, which was appointed by Top Glove earlier to rectify the CBP issue.

Comments

• Rectifying on existing issues. Management highlighted that no additional issues have been raised but only need some additional rectification works on existing findings. The Group has identified and rectified some International Labour Organization Forced Labour Indicators and currently needs to resolve on five indicators which include retention of identity documents, deception, debt bondage, physical and sexual violence and intimidation. The Group is actively engaging with the CBP and expecting to submit their action plans to CBP within this month.

• Independent adviser’s views. Mr Andy indicated that Top Glove’s management has addressed this issue effectively as the progress has been improved a lot and he believed the matters will be resolved soon. He mentioned that Top Glove was not the only glove company who faced Environmental, Social, and Corporate Governance (ESG) issues. Other glove makers also being alerted by CBP but not being named out. As for now, he said no force labour issue in Top Glove. Top Glove current priorities include ESG and he believes the Group has fulfilled the social compliance at this juncture.

• No impact from other countries’ productions. According to the management, some Malaysia plants have stopped production to US due to withhold order released. Nevertheless, plant from China, Vietnam and Thailand are still able to ship to US. Notably, America is the main market for the Group’s business which makes up 30% of sales volume during FY20 (both Latin America and North America). The Group hopes to resolve this matter as soon as possible as it will hurt the production, thus affecting the Group’s business performance. Meanwhile, the Group is being transparent with their shareholders and will continue to do so.

• Improvement in workers’ living condition is on track. Currently, Top Glove has spent c.RM90m for accommodations and facilities which included relocation of around 2,000 of their employees to new accommodations, known as Westlife-PKNS in Petaling Jaya in last December. For mid-term planning, the Group targets to spend another c.RM195m for new workers hostels, purchasing an apartment block in Klang as well as building and acquiring additional houses, apartments and hostels in other states.
   
• ASP to taper off given softening demand. The management optimistic that demand for rubber gloves remains intact mainly driven by European market in view of recent resurgence of Covid-19. Nevertheless, average selling price (ASP) will be adjusted downwards, based on market price, probably down by c.3%-5% mom. This is in tandem with our view as we reckon that ASP growth to taper off moving forward. Glove demand will be easing off going forward in conjunction with higher effectiveness vaccination rate among population in addition to the incoming competition which is slated for production during 2HFY21.

Earnings Outlook/Revision

• No changes to our earnings forecast.

Valuation & Recommendation

• Maintain HOLD with an unchanged target price of RM5.80. Our target price is pegged at 13.3x FY22F PER of 43.7sen. Our valuation is assigned to FY22, considering the impact of earnings normalisation after exponential yet exceptional strong profit growth in FY21F pursuant to the pandemic. Market is forward looking and hence we opine that current share price looks beyond its prevailing peak earnings and starts to price in recovery theme upon successful mass vaccination globally.

Source: JF Apex Securities Research - 9 Apr 2021