Kenanga Research: Top Glove’s earnings on track but ESG a concern

DESPITE its earnings being on a strong growth track in FY2021, concerns over environment, social and governance (ESG) issues can potentially de-rate prospects of the world’s largest glove maker.

In its latest company update, Kenanga Research reiterated that Top Glove Corp Bhd has been in the spotlight due to its workers’ housing conditions and high COVID-19 infection rate that led to the implementation of an enhanced movement control order (EMCO).

The research house further recalled that on Nov 23, the Government announced that 28 of Top Glove’s factories in Klang would temporarily cease operations in stages to allow the factory workers to undergo screenings and mandatory quarantine in an effort to contain the spread of the virus among its employees.

On the bright side, however, Kenanga Research noted that Top Glove’s management is confident of robust demand over the next two years due to continuous acute shortage and still surging cases of COVID-19 in Europe and the US.

“Case in point, the US stockpile dropped from 16.9 billion pieces in December 2019 to 2 billion pieces in October 2020,” analyst Raymond Choo Ping Khoon pointed out.

“Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new user groups and increased hygiene awareness.”

Looking ahead into 2Q FY2021, Kenanga Research projected Top Glove’s  average selling price (ASP) during that period to jump by 30% quarter-on-quarter with higher volumes from new capacities and product mix skewed towards higher margin nitrile gloves.

As per what was divulged when Top Glove announced its record-breaking earnings feat of RM2.4 bil on Dec 9, Kenanga Research said efforts to source for more worker accommodation and to improve existing ones have been ongoing for which the group has already invested RM70 mil.

Additionally, the group has spent RM20 mil purchasing 100 units of apartments over the past two months as well as renting more houses for its workers.

Over the medium-term, the group has earmarked approximately RM100 mil to be invested in workers’ facilities and accommodation which includes building mega hostels in Klang and Banting with a combined capacity of 7,300 pax fully equipped with a suite of amenities and facilities.

“So far 8,357 workers or 94% of those tested positive and have recovered or tested negative are ready to resume work,” justified Choo. “Presently, its Klang factories’ utilisation is slowly ramping up with the re-opening of all 28 factories.”

All-in, Kenanga Research slashed Top Glove’s target price by 20.4% to RM8.50 (from RM10.68 previously) but nevertheless kept the company’s “outperform” rating.

“(This is) based on revised 9.1 times unchanged CY2021E earnings per share (EPS) (previously 11.5 times) as we attach a 20% discount to our target price-to-earnings ratio (PER) to take into account ongoing concerns over ESG-related issues particularly those related to its foreign workers,” the research house pointed out.

“Moreover, re-emergence of COVID-19 cases in the future, if any, could cause temporary disruption in production.”

At 9.35am, Top Glove was down 11 sen or 1.69% to RM6.38 with 2.31 million shares traded, thus valuing the company at RM52.32 mil. – Dec 28, 2020

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