As Malaysia has 2m documented migrant workers and as many as 2-4m (2018) undocumented, Macquarie Equities Research (MQ Research) released a report (27 Jul) stating that there are concerns over risks for other companies, following the US Customs and Border Protection’s restriction on the two Top Glove subsidiaries from exporting gloves into the US due to labour issues.

MQ Research believes that the plantations and manufacturing sectors face the greatest risks from labour policy scrutiny.

Event

• The US Customs and Border Protection’s (CBP) restriction on two Top Glove subsidiaries from exporting gloves into the US due to labour issues has raised concerns over risks for other companies. Malaysia has 2m documented migrant workers and as many as 2-4m (2018) undocumented, according to the International Organization for Migration (IOM). While migrant workers are found in various sectors, the impact from sanctions by foreign regulators would be highest for the manufacturing and plantations sectors. Ultimately, the higher costs will work their way into higher prices and mitigate the impact on corporate profits but in the near term, corporate earnings could be hit by <5% depending on industry dynamics.

Impact

• Plantations and manufacturing face greatest risk. MQ Research believes that in the listed space, the plantations and manufacturing sectors face the greatest risks from greater scrutiny on hiring practices. In addition to the restrictions on glove manufacturers (Top Glove and WRP Asia) due to labour issues, the plantation sector faced issues from the EU on environmental issues surrounding crude palm oil (CPO), which led to the setting up of the Roundtable of Sustainable Palm Oil (RSPO). In the latter, companies have been required to meet higher environmental and labour standards to be certified for exports to customers requiring these higher standards. Construction and the service sectors which cater to the domestic market are unlikely to face greater scrutiny until such time that the government forces these.
• Prices will rise to mitigate profit impact. In the medium term, MQ Research expects prices of goods/services impacted by the higher labour costs to rise as customers demanding higher standards of governance agree to absorb the costs of the higher standards demanded from their suppliers. In the short term, the glove producers under MQ Research’s coverage stand to face a ~1% impact to profits from higher hiring costs with a 3% hit to FY21 profits on compensation to workers who incurred fees in prior years. The glove producers claim to have zero hiring fee policies since 2019, although it is unclear as to which of the fees are absorbed. For the plantation sector, MQ Research understands that workers currently bear hiring costs via monthly deductions. If plantation companies were to absorb the annual costs, profits could be impacted by ~1%.
• Relook of hiring process needed. Hiring agencies (domestic and foreign) appear to be where the bulk of the fees paid by migrant workers accrue. To maximise their income, MQ Research understands that a large number of migrant workers leave their initial employers and become “undocumented” and move to suburban areas to work on farms and smallholder run plantations.

Outlook

• MQ Research maintains its positive view on the gloves and currently have a neutral view of plantations. These environmental, social and governance (ESG) issues are an overhang for both but should not impact valuations in the near term if companies are quick to resolve issues – with valuation upside from doing the right thing.

Source: Macquarie Research - 29 Jul 2020