TOPGLOV (7113) Top Glove Corporation Berhad- Summoned with Detention Order
Two of Top Glove’s subsidiaries were summoned with a detention order by the US Custom and Border Protection (CBP), potentially due to the retrospective recruitment fees paid by its foreign workers to recruitment agents before the implementation of its Zero Recruitment Fee Policy. However, the Group is confident that the issue could be resolved within 2 to 4 weeks, as soon as the Group reimburses its foreign workers with the agency fees paid previously. Should Top Glove fail to settle this issue, the Group can also opt to redirect its shipments to other countries. On a side note, we raise our earnings forecast for FY20-22F by 37-60%, as we take into account the effects of the stronger-than-expected ASP hike in the coming months. However, given the current overhang situation, we lower our PE multiple to 26x (at +0.5SD of its 5-year historical mean), awaiting a resolution on this issue. Our TP is subsequently raised to RM23, maintain Trading Buy. Downside risk to our call includes (i) possible derating should the Covid-19 outbreak start to show signs of subsiding, (ii) ASP not able to sustain at high levels and (iii) the European countries to follow suit and block the entry of Top Glove’s shipments.
Background of the issue. It was brought to light that disposable gloves manufactured under two of Top Glove’s subsidiaries, Top Glove SB and TG Medical SB has been served a detention order by the US Customs and Border Protection (CBP). Top Glove has highlighted that the ban could likely be due to the recruitment fees paid by their foreign workers to the agents, prior to starting work in Malaysia, of which it is an unacceptable practice in the eyes of labor activists. We also note that, after the Zero Recruitment Fee Policy implementation in January 2019, Top Glove has since been bearing all recruitment fees incurred.
Actions taken. Top Glove is currently reaching out to CBP to understand the basis of the detention order on its glove shipments and the Group has also engaged a third-party independent consultant to help lift the detention order. The said consultant had previously helped uplift the detention order imposed onto WRP as well.
Implications. Top Glove’s management is positive that the issue in hand can be resolved within 2-4 weeks’ time, as long as the Group reimburse its foreign workers with the agent fees incurred, of which the total sum is estimated to range between RM20m to RM50m. Top Glove is also optimistic that they could reach a quick settlement with CBP, especially during this crucial time.
In the interim, Top Glove will continue shipping its gloves to the US and park the inventories at the Free Trade Zone. Once the matter is resolved, the gloves are expected to be released to its customers in the US immediately. However, if Top Glove fail to sort out the problem with CBP, the Group can choose to reroute the shipments to other countries. Given the strong glove demand, the shipments are expected to be taken up swiftly. We highlight that North America accounts for 25% of the Group’s topline, while both the subsidiaries mentioned above accounts for half of the total sales from US, at c.12.5%.
Our view. We believe that the Group’s huge order backlog will certainly help to mitigate the impact of this unanticipated detention order as it can redirect its shipments away from the US and to be absorbed by other countries. However, if the underlying issue of the detention order differs from Top Glove’s expectations and could not be solved in a timely manner, we think that the Group would be negatively impacted as it is unsure at this juncture whether the CBP would impose a blanket ban onto all of Top Glove’s subsidiaries and the North American region accounts for a whopping 25% of its sales
Source: PublicInvest Research - 17 Jul 2020