This article first appeared in The Edge Malaysia Weekly on December 14, 2020 - December 20, 2020

ANALYSTS remain positive on Top Glove Corp Bhd despite the environmental, social and governance (ESG) concerns that have emerged over the glove maker’s staff living quarters.

While they imputed a discount on their target prices for Top Glove because of this, most of the analysts have maintained their bullish calls on the company following the release of its results for the first quarter ended Nov 30 (1QFY2021) — it posted a record net profit of RM2.38 billion on its highest ever quarterly revenue of RM4.76 billion.

RHB Investment Bank, for example, has maintained its “buy” call on Top Glove but ascribed a 10% ESG discount to its target price and cut its ESG score for the group to 2.78 (from 3.22) on lower points for the Social or “S” component.

CGS-CIMB, while maintaining its “add” call, has cut its target price on the rubber glove giant by 11% to RM8.90 per share from RM10 previously. The cut was premised on a lower price-to-earnings ratio of 16 times for calendar year 2022 from 17 times previously to account for ongoing concerns over the ESG issues, particularly in relation to its foreign workers.

Maybank Investment Bank’s target price of RM8.65 for Top Glove assumes a higher weighted average cost of capital as it takes into consideration the social compliance issues.

Meanwhile, the Employees Provident Fund (EPF), which emerged as Top Glove’s substantial shareholder on Sept 21 with a 5.05% stake, has been trimming its shareholding in the glove maker. According to Top Glove’s filing with Bursa Malaysia on Dec 10, EPF sold 1.5 million shares on Dec 7, leaving the pension fund with a 5.56% direct stake comprising 445.65 million shares in Top Glove. Since Dec 1, EPF has divested a total of 22.14 million shares in the company.

Industry observers believe ESG concerns may be the main reason for EPF’s divestment of Top Glove shares.

“EPF has stated its priority on sustainability many times. The ESG issues surrounding Top Glove are of grave concern right now and EPF is strict with its investments,” a market watcher tells The Edge.

Top Glove’s 28 factories in Meru, Klang — which account for 50% of its production capacity — will remain shuttered for the next two to three weeks due to the outbreak of Covid-19 among its workers, mainly migrants. The company’s 13 other factories are located in Ipoh, Perak; Port Dickson and Nilai in Negeri Sembilan; Kota Baru, Kelantan; Kluang, Johor; and Kulim, Kedah.

As at Dec 8, Top Glove said that out of the 8,868 employees tested, there were 5,147 positive cases, with the remaining 3,721 workers testing negative.

Of the 5,147 positive cases, 4,636 or 90% have recovered and been certified fit to work. Of the 28 factories that were temporarily shut down, one has resumed operations while the rest are expected to resume normal operations in two to three weeks.

The Enhanced Movement Control Order at crowded Top Glove worker dorms in Klang, first imposed due to the high number of Covid-19 cases among its workers, is in place until Dec 14.

On Dec 1, the Ministry of Human Resources said it had opened 19 investigation papers against six companies related to Top Glove for failure to apply for an accommodation certificate from the director-general of the Department of Labour of Peninsular Malaysia, which led to the discovery of other offences, including dense, uncomfortable accommodation and lack of proper ventilation.

Top Glove is being investigated under the Workers’ Minimum Standards of Housing and Amenities Act 1990 (Act 446).

In a virtual press conference on Dec 9, Top Glove managing director Datuk Lee Kim Meow said it had invested some RM70 million to improve existing accommodations. He said it had already spent RM20 million to purchase 100 units of apartments and rent more houses for its workers. Moving forward, Top Glove will tap an additional RM100 million allocated for new hostels and houses to accommodate 7,300 employees in tandem with its expansion plans.

According to Lee, the company will also incorporate workers’ accommodation into the layout plan for its upcoming Factory 42 so that workers may benefit from the integrated infrastructure. The plans are said to include the building of mega hostels in Klang and Banting, which will be fully equipped with amenities and facilities.

“We are doing all this to improve the living conditions of our workers, which we have always taken very seriously. The current situation is a wake-up call and we are learning from it,” Lee told journalists.

Since September, the company has spent more than RM1 billion on a massive buyback exercise. In addition, its chairman Tan Sri Lim Wee Chai took up 4.28 million shares for RM29.77 million in two transactions on Dec 9 and 10.

According to a Bursa Malaysia filing on Dec 10, Lim bought 2.856 million shares at RM6.929 per share and 1.428 million shares at RM6.993 per share, giving him direct and indirect stakes of 26.13% and 8.63% respectively in the company.

When queried in a subsequent email interview if the company was allowed to buy back its shares within the one-month blackout period prior to the release of its financial results, Lim replied that the blackout period only applies to the directors and principal officers of the company.

On concerns that the massive share buybacks might trigger a mandatory general offer (MGO), Top Glove executive director Lim Cheong Guan said: “As the company has bought back shares of [only] over 2%, the question of an MGO will not arise. Our chairman Lim’s share buys over the last six months have been below the threshold percentage; therefore, an MGO will never happen.”

The chairman also kept mum on the company’s plans to continue buying back shares, saying it would “evaluate the need for share buyback on an ongoing basis, taking into account the share price, the potential earnings, the available cash in hand”. Note that Tropicana Corp Bhd — of which Lim is chairman and in which he has an 11.07% stake — also bought RM78.47 million worth of Top Glove shares on Dec 4.

In response to a query from Bursa, Tropicana said the acquisitions were undertaken as part of its investment strategy to capitalise on the potential robust growth of Top Glove. It added that Lim had voluntarily abstained from deliberating and voting for the acquisitions.

For 1QFY2021, Top Glove’s earnings per share ballooned to 29.64 sen from 1.5 sen last year. The group declared a 16.5 sen dividend per share — the highest interim dividend in the group’s history and more than what analysts expected as the payout ratio of 56% incorporates an additional 6% more than its 50% payout policy.

Compared with a year ago, Top Glove’s 1QFY2021 performance was buoyed by higher sales volume and average selling prices, margin expansion and better economies of scale.

According to Bloomberg, analysts have a 12-month consensus target price of RM8.99 on Top Glove with 17 having a “buy” call, five “hold” and one “sell”.

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