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ESG issues weigh on Top Glove’s valuations

KUALA LUMPUR (Dec 10): The environmental, social and governance (ESG) issues afflicting Top Glove Corp Bhd have led to analysts revising the company’s valuations.

CGS-CIMB, while maintaining its “add” call for Top Glove, has cut its target price (TP) on the rubber glove giant by 11% to RM8.90 per share from RM10 previously. This cut is premised on a lower price-to-earnings (PE) ratio of 16 times for calendar year 2022 (CY22) from 17 times previously.

“We cut our TP to RM8.90 based on 16 times CY22 P/E, -0.5SD (standard deviation) of its five-year mean (previously 17 times P/E). The lower P/E is to account for ongoing concerns over ESG-related issues, particularly related to its foreign workers.

“Nevertheless, we still like Top Glove as it is a key beneficiary of higher glove demand due to the Covid-19 pandemic, given its position as the world’s largest glove maker,” CGS-CIMB analyst Walter Aw said in a note today.

Meanwhile, RHB Research analyst Alan Lim said that in line with his higher earnings estimates, he had increased Top Glove’s equity value per share to RM10.56 from RM9.50 previously.

Lim said that in light of the high number of Covid-19 cases at Top Glove’s hostels, he had ascribed a 10% ESG discount to derive its overall TP.

As such, Lim’s TP of RM9.50 still remained unchanged after applying the 10% ESG discount on the RM10.56 equity value per share.

“Our ESG score for Top Glove has been cut to 2.78 (out of four from 3.22) on lower points for the social or 's' component,” Lim said, maintaining his “buy” call for Top Glove.

A fund manager, who requested anonymity, said ESG-focused funds would not be queuing up to add counters with ESG issues.

Even for non-ESG focused funds, seeds of doubt would emerge in terms of whether such ESG issues would hurt a company’s long-term business continuity and returns to shareholders, he said.

Reputation, he added, is not an abstract concept and has a real-life impact in terms of whether investors choose to invest in a particular counter.

“ESG issues such as labour issues do have a material impact in terms of whether investors invest in a particular company. Top Glove is certainly not the worst when it comes to these issues, but it has to demonstrate to the wider market that this is something it is willing to address and ensure it does not repeat in the longer term,” said the fund manager.

Another analyst, who asked not to be named, said that while ESG issues are among the factors taken into consideration by investors, they would lean more towards earnings and returns on their investments.

“In the case of Top Glove, their recent RM2.4 billion net profit for the first quarter ended Nov 30, 2020 (1QFY21) and dividend payout of 16.5 sen are something that would hold more weight with investors,” the analyst said.

He added that investors (including funds) would have to balance ESG criteria as well as the performances of their portfolios.

However, he said ESG themes would play a bigger role moving forward as awareness is raised. Buy- and sell-side analysts would have to highlight a particular company’s ESG performance, especially as big funds like the Employees Provident Fund (EPF) wants ESG considerations to be included alongside traditional financial metrics starting from next year.

It is worth noting that Top Glove is on the FTSE4Good Bursa Malaysia and the Dow Jones Sustainability Indices' (DJSI) Emerging Markets Index.

Top Glove has been in the spotlight due to its workers' housing conditions, recording high Covid-19 conditions that led to the implementation of an enhanced movement control order (EMCO)

On Nov 23, the government announced that 28 Top Glove 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 the employees.

Top Glove shared at an analyst briefing yesterday that it was improving employee accommodation following its non-compliance with the Workers' Minimum Standards of Housing and Amenities Act 1990 (Act 446).

“It recently bought 100 apartments for RM20 million for its workers and rented additional houses to comply with the authorities’ requirements,” MIDF Research noted.

“Going forward, it is allocating RM100 million for new hostels and houses to accommodate 7,300 employees in tandem with its expansion plan. It is also incorporating workers’ accommodation in the upcoming Factory 42 in its layout plan, so that the integrated infrastructure may benefit its employees,” added the research house.

Top Glove has clearly been a beneficiary of the Covid-19 pandemic, having risen by over 350% from RM1.55 on Jan 2. However, its share price has fallen recently amid news of the development of Covid-19 vaccines and its workers' housing issue that led to the temporary closure of its factories. The stock has come down by 26.77% from its Oct 19 closing price of RM9.60.

Top Glove was trading 15 sen or 2.19% higher at RM6.99 as at 3.50pm today, valuing the group at RM57.3 billion. Some 35.6 million shares had been traded.


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