No way out: Forced labour issue continues to haunt Top Glove

FOR Top Glove Corp Bhd, forced labour is akin to the Sword of Damocles hanging over its head.

This is despite the world’s largest glove maker having taken all the necessary measures to prevent breaches of its labour procedures – including the appointment of Impactt as an independent consultant which found no systemic forced labour within the group as of January 2021.

Yesterday (March 29), the US Customs and Border Protection (CBP) claimed that certain disposable gloves produced by Top Glove were found to be produced with the use of convict, forced or indentured labour, and are likely being imported into the US.

This has led to CBP instructing personnel at all US ports of entry to begin seizing disposable gloves produced in Malaysia by Top Glove. The finding expands upon a Withhold Release Order (WRO) that CBP issued on gloves manufactured by Top Glove in July 2020.

TA Securities Research is negative on the news as it has expected the CBP to lift the WRO on Top Glove’s subsidiaries Top Glove Sdn Bhd and TG Medical Sdn Bhd that was imposed in mid-July 2020.

Both subsidiaries account for 12.5% of US sales, while the US market accounts for 25% of Top Glove’s sales, according to the research house.

“Assuming that all of Top Glove’s products are not allowed to enter the ports of US, our FY2021/FY2022/FY2023 earnings forecasts would decline by 1.6%/2.8%2.7%,” projected analyst Tan Kong Jin in a company update.

“Note that the average selling prices (ASPs) of glove is higher by about 10% in the US market.”

Given the current development, TA Securities Research has lowered Top Glove’s FY2021 earnings estimates by 4.8% after lowering its sales assumptions by 1.3% while maintaining its FY2022/FY2023 earnings assumptions.

The research house’s ASP assumptions for FY2021/FY2022/FY2023 are US$73.3/US$41.8/US$31.5 per 1,000 pieces of gloves.

All-in, TA Securities Research lowered Top Glove’s target price by 26% to RM5.77 (from RM7.80 previously) while maintaining its “buy” rating on the glove maker.

Meanwhile, Hong Leong Investment Bank (HLIB) Research also tweaked its valuation of Top Glove accordingly given the latest news has resulted “in cloudier earnings certainty and negative investor sentiment”.

“All-in-all, our target falls from RM8.14 to RM7 (14% discount) (but we) maintain a “buy” call as we reckon the weak share price performance alongside undemanding valuations has somewhat reflected the negatives,” justified analyst Gan Huan Wen.

At 9.50am, Top Glove was down 19 sen or 3.76% to RM4.86 with 21.65 million shares traded, thus valuing the company at RM39.88 bil. – March 30, 2021

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