It’s not only about dollars and cents; Top Glove needs to buck up its ESG scores

RHB Research’s latest news flash on Top Glove Corp Bhd under the heading “US CBP Issues a Minor Blip in the Long Run” warrants attention not because the research house has maintained its “buy” rating on the world’s largest glove maker despite its recent US Customs and Border Protection (CBP) hiccup.

While retaining Top Glove’s target price at RM6.80, the research house remains bullish on the glove maker in view of (i) efforts undertaken to improve its foreign workers’ well-being which should eventually resolve the issue; (ii) its attractive near-term dividend yield of circa 17%; and (iii) low FY2023 price-to-earnings ratio (P/E) of 10.2 times (average: 18 times).

Notwithstanding the very fact that the impact of this issue on Top Glove’s financial and operational performance cannot be ascertained at this juncture, RHB Research has raised red flags that the latest development is negative insofar as ESG (environment, social and governance) perception among investors is concerned.

“We maintain our ESG score at 2.78 (out of maximum 4) as we have assigned a lower score of “moderate” for its “S” (social) aspect,” justified analyst Alan Lim. “Our target price RM6.80 has priced in 10% ESG and 10% operating risk discounts.”

Delving further into Top Glove’s social aspect, RHB Research is concerned over the high number of COVID-19 cases which have been reported at Top Glove’s hostels.

“We believe that improvements are needed in this area,” opined the research house. “The company has spent RM20 mil to purchase 100 units of apartments for its workers in the past two months (over its current 100 units of double-storey houses and hostels).”

In all fairness, however, Top Glove scored a “good” for the environment and “excellent” for governance.

With regard to the governance element, RHB Research noted that 50% of Top Glove’s board members are independent while 42% are female, thus exceeding the Malaysian Code on Corporate Governance’s requirement of 30%.

“Additionally, Top Glove provides full disclosure on its directors’ remuneration, including salaries and bonuses, and on a named basis,” observed the research house.

“Top Glove has an in-house investor relations team, and holds investor briefings regularly, embodying good transparency and disclosure practices.”

Moving forward, RHB Research said a resolution of the CBP issue and a stable long-term average selling prices (ASP) above US$40 over the long run is vital for the rebound of Top Glove’s share price which has fallen by 46% from the peak recorded in October 2020.

“The (impending) risks are lower-than-expected glove ASP after COVID-19 ends, lower-than-expected sales volume/US$, and higher-than-estimated raw material prices,” added the research house.

At 9.53am, Top Glove was down 26 sen or 5.44% to RM4.52 with 19.18 million shares traded, thus valuing the company at RM37.09 bil. – March 31, 2021

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