KUALA LUMPUR (Dec 28): Kenanga Research has cut its target price (TP) for Top Glove Corp Bhd to RM8.50, from RM10.68 previously, reflecting ongoing concerns over its environmental, social and governance (ESG)-related issues.

In a note today, Kenanga analyst Choo Ping Khoon said in his forecasts, he lowered the TP based on revised 9.1 times unchanged 2021 earnings per share (EPS; previously 11.5 times) as he attached a 20% discount to his target price-earnings ratio (PER) to take into account the ongoing concerns over Top Glove's ESG-related issues, particularly those related to its foreign workers.

“Moreover, re-emergence of Covid-19 cases in future, if any, could cause temporary disruption to production,” he said.

He noted that Top Glove had been in the spotlight of late, largely due to the conditions of its workers' quarters, which recorded high Covid-19 infections and raised ESG concerns.

On Nov 23, the government announced that 28 of Top Glove’s factories in Klang will 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.

“Despite [the fact that Top Glove's] earnings [are] on a strong growth track for FY21, concerns over its ESG issues could potentially derate the stock,” Choo said.

According to the note, efforts to source for more worker accommodations and improve existing ones had been ongoing — in which the group had already invested RM70 million.

In addition, the group spent RM20 million purchasing 100 units of apartments over the past two months and is also renting more houses for its workers.

Over the medium term, the group has earmarked approximately RM100 million to be invested in workers’ facilities and accommodations, including 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.

“Presently, its Klang factories’ utilisation is slowly ramping up with the reopening of all of the 28 factories,” said Choo.

Meanwhile, Choo said, the management is confident of robust demand over the next two years due to a continuous acute shortage and surging cases of Covid-19 in Europe and the US.

Looking ahead into the second quarter ending Feb 28, 2021 (2QFY21), Choo expects Top Glove’s average selling price (ASP) in 2QFY21 to jump by 30% quarter-on-quarter (q-o-q), with higher volumes from new capacities and a product mix skewed towards higher-margin nitrile gloves.

He reiterated his "outperform" call for the stock, citing its merits are its resilient earnings base due to its pricing power and sheer capacity size in the industry, and solid earnings growth forecasts averaging over 100% for FY21, compared to a PER of 5.7 times.

At 10.45am, Top Glove had fallen 1.85% or 12 sen to RM6.37, giving the stock a market capitalisation of RM52.24 billion.