Top Glove - Maybank Kim Eng 2020-07-17: Temporary Impact From US Detention Order; BUY on weakness

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Temporary Impact From US Detention Order

Buy on weakness

• About 12.5% of Top Glove (SGX:BVA)’s sales volume could be temporarily affected by US detention order. See Top Glove Announcements.
• We advocate investors to BUY on weakness for:
  1. The issue could be resolved in 2-4 weeks as Top Glove settles the retrospective recruitment fees;
  2. In the event that the issue is long-drawn, Top Glove may re-route the detained shipments to other markets.
• We maintain our earnings forecasts, BUY call and Target Price of MYR21.90 (23x CY21E P/E, +0.5SD to 5-year mean). See Top Glove Share Price.

Could be due to the retrospective recruitment fees

• On 15 Jul, US Customs and Border Protection (CBP) has placed a detention order on the gloves produced by two of Top Glove’s subsidiaries (Top Glove Sdn Bhd and TG Medical Sdn Bhd). Top Glove believes that this could be due to the retrospective recruitment fees being paid by its foreign workers to the agents prior to Jan 2019.
• Note that Top Glove has implemented Zero Recruitment Fee Policy since Jan 2019.

Confident of resolving in 2-4 weeks

• Top Glove has engaged a consultant which helped WRP (a local glove manufacturer) in getting off the detention order list in Mar 2020. It is confident that the issue can be resolved in 2-4 weeks as it would be reimbursing its workers the pre-2019 recruitment fees as soon as possible. The total reimbursement amount could be MYR20-50m (or 1-4% of our FY20E net profit).
• Additionally, given the acute glove shortage in US, the possibility of a fast resolution is also high.

Worst case scenario

• We think a worst case scenario would be the detention order issue is protracted, resulting in:
  1. other subsidiaries facing detention order; and
  2. a significant portion of the lucrative spot order is lost.
• In total, US accounts for 25% of Top Glove's sales volume while the 2 affected subsidiaries account for 12.5% of group’s sales volume. Meanwhile, spot accounts for c.20-30% of its total sales volume now.
• That said, Top Glove can still re-route its gloves to other markets (i.e. Latin America, Canada), which buy at ASPs c.5% below that of US.
• See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-07-17

SGX Stock Analyst Report BUY MAINTAIN BUY 21.900 SAME 21.900