Kuala Lumpur Kepong Berhad (KLK) conducted a briefing yesterday to provide updates on recent allegations concerning unethical recruitment practices by sub-agents. Overall, we view the group’s prompt response positively, along with its detailed description of the situation. Having said that, we believe the share price is unlikely to be impacted by the allegations. The investigation is ongoing, with management aiming to resolve the entire issue by the end of the month. Nevertheless, if the forced labour allegations escalate and link to its entire businesses, especially palm oil, the group could face penalties through ESG ratings, potentially causing investors to shy away from the stock until further clarity. Maintain KLK as SELL with an unchanged target price of RM21.50, based on CY24 PER of 18x.

Allegations of Unethical Recruitment

To recap, KLK recently announced that it has conducted an internal investigation in response to recent allegations made by Sajha Sabal Media, a news portal in Nepal, regarding unethical recruitment practices by sub-agents of SOS Manpower Service (SOS). SOS is an appointed agent responsible for recruiting Nepalese foreign workers for KL-Kepong Rubber Products Sdn Bhd (KLKRP), a subsidiary of KLK. KLKRP specialises in OEM and private label production for reusable gloves.

Issue to be Solved by End of the Month

According to management, approximately 140 Nepalese workers are implicated in this incident and the arrival of these foreign workers has been temporarily delayed while the inquiry continues. The amount of the potential related fees is yet to be determined, and KLK has engaged an independent third-party to examine these claims and provide an unbiased assessment on the case. Management intends to resolve the entire issue by the end of the month and facilitate the arrival of these 140 Nepalese workers in Malaysia. To recap, Malaysia has issued a circular outline that all employers with an active quota for foreign workers are required to bring in workers in Malaysia by 31 May, 2024.

KLK’s Commitment to No Recruitment Cost Policies and Practices

Since 2018, KLK has enforced a no recruitment fee policy, absorbing all employer-related expenses such as transportation, visas, work permits, medical checks, and training/orientation costs. This measure aims to prevent the imposition of recruitment-related fees on workers at any stage of the recruitment process. KLK has confirmed that it has fully reimbursed all recruitment and related fees to comply with the group’s strict no-recruitmentfee policy. More importantly, KLK reiterates the group’s readiness to take all necessary and appropriate actions, including possible termination, and address any gap and implement corrective measures.

Valuation

We maintain KLK as SELL with an unchanged TP of RM21.50, based on CY24 PER of 18x. We maintain our ESG rating pending the third party assessment report.

Source: TA Research - 7 May 2024