KUALA LUMPUR (March 30): Top Glove Corp Bhd lost as much as 25 sen or 4.95% to RM4.80 after the US Customs and Border Protection (CBP) found that some of its products were manufactured with the use of convict, forced or indentured labour.
At 9.53am, the world largest rubber glove maker had pared some losses at RM4.85, still down by 20 sen or 3.96%. It was the third top loser this morning.
The counter, among the top 10 most actively traded stocks, had seen 23.52 million shares change hands.
Hong Leong Investment Bank (HLIB) Research analyst Gan Huan Wen said in a note today that the news was an unfortunate negative as all goods found to have been produced by convict, forced or indentured labour will not be permitted to be imported by the US.
Despite this, he said Top Glove is liaising with the CBP to obtain more clarity of the findings.
He also said since allegations were made against Top Glove in mid-calendar year 2020 (CY20), the company had taken extensive remedial action to improve its labour practices, including remediation payments to workers, blacklisting unethical recruitment agents, enhancing labour accommodations and ensuring workers are not tasked with excessive overtime.
Furthermore, Top Glove had shared that an independent international consultant concluded on March 9, 2021 that the company’s actions “do not amount to systematic forced labour”, he added.
“While this ruling may result in Top Glove being prohibited from exporting products to the US for the time being, note that Covid-19 cases rebounding recently may provide support for Top Glove’s sales [and share price],” he said.
“While this news is undoubtedly negative, we understand Top Glove is in contact with the CBP to obtain more information on the findings. As such, we keep our forecasts unchanged for the time being,” he added.
With the news resulting in cloudier earnings certainty and negative investor sentiment, he also tweaked Top Glove's valuation methodology accordingly.
“We value Top Glove with a price-to-earnings (P/E) multiple of 15 times (from 18 times previously) tagged to sustainable earnings in a post-supernormal earnings environment (the financial year ending Aug 31, 2023 or FY23) summed with free cash flows generated during the boom period (both discounted back to present value).
“Furthermore, we tweak our discount rate to 9.2% from 8.7% previously. All in all, our target price falls from RM8.14 to RM7,” he said.
However, he maintained "buy" on the stock as he reckoned the weak share price performance alongside undemanding valuations had somewhat reflected the negatives.
In a notice published yesterday, the CBP said certain disposable gloves had been “mined, produced or manufactured in Malaysia by Top Glove Corp Bhd with the use of convict, forced or indentured labour, and are being, or are likely to be, imported into the US”.
“Through its investigation, the CBP has determined that there is sufficient information to support a finding that Top Glove is manufacturing disposable gloves with forced labour, and that such merchandise is likely being imported into the US,” it said.
Based on this, the regulator said the port director may seize the covered merchandise for violation of the Tariff Act, and commence forfeiture proceedings, unless the importer establishes by satisfactory evidence that the merchandise was not produced in any part with the use of prohibited labour.
In a separate press statement, the CBP said yesterday it had directed personnel at all US ports of entry to begin seizing disposable gloves produced in Malaysia by Top Glove.
“Today’s forced labour finding is the result of a months-long CBP investigation aimed at preventing goods made by modern slavery from entering US commerce,” said Troy Miller, a senior official performing the duties of the CBP commissioner. “The CBP will not tolerate foreign companies’ exploitation of vulnerable workers to sell cheap, unethically-made goods to American consumers,” he added.
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