Top Glove - CGS-CIMB Research 2020-10-07: Revising Its Remediation Fee Payment


Top Glove - Revising Its Remediation Fee Payment

  • Top Glove (SGX:BVA) announced that it has revised its remediation sum to RM136m post the completion of the independent consultant’s verification work.
  • We assume this is a one-off payment and will not affect our FY21-23 EPS.
  • Reiterate ADD with unchanged Target Price of RM10.00 (17x CY22 P/E).

Raising its remediation fee payment to RM136m

  • Top Glove announced yesterday that it has revised its remediation fee (in respect to recruitment fees previously paid by the migrant workers to agents or other parties) to RM136m from RM53m previously. This is based on recommendations by its independent consultant post the completion of a comprehensive verification.
  • All necessary information has also been submitted to US Customs and Border Protection to achieve a swift resolution on the Withhold Release Order (WRO) implemented on two of Top Glove’s subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd, since 15 Jul 2020.

This is to compensate up to an estimated 11,300 migrant workers

  • Based on our channel checks, this revised remediation sum encompasses up to 11,300 of its current migrant workers from our estimate of a total existing 12,000 to 13,000 total foreign workforce. Top Glove also stated that its migrant workers will receive this remediation fee over the next 10 months from Oct 20 onwards.
  • Note that Top Glove had earlier made the first two remediation payments (RM4.4m each – totalling 6.5% of estimated revised remediation fee) in August and Sep 2020. Hence, the total remaining amount to be paid is about RM127.2m.

We consider this a one-off payment, no impact on our core earnings

  • Note that this revised remediation fee mainly accounts for the period prior to the Zero Cost Recruitment Policy that has been implemented since Jan 19. Hence, we will assume this is a one-off non-recurring payment and that it will not impact our core FY8/21-23 EPS forecasts.
  • For illustration purposes, assuming we account for the remaining RM131.6m payment (including RM4.4m paid in Sep 20) in our FY21 forecast, this will negatively impact our FY21 net profit forecast by 1.2%.

Expecting this to expedite the lifting of CBP ban

  • We believe the announcement of the revised remediation fee should aid in expediting the lifting of the WRO slapped on both Top Glove’s subsidiaries. We also understand that Top Glove continues to be in active conversation with CBP to identify and mitigate any other outstanding issues that led to the implementation of WRO.
  • Even in a worst-case scenario where the WRO will only be lifted by end-CY20, we believe that this will not have a negative impact on Top Glove’s FY21-23F EPS estimates. This is because gloves exported to the US by both Top Glove’s subsidiaries (we estimate that US sales by both subsidiaries make up 12.5% of Top Glove’s FY8/20 sales) can be re-routed to other countries or markets on the back of the current acute shortage of gloves globally.

Reiterate our ADD call on Top Glove with unchanged Target Price of RM10.00

  • No changes to our ADD call and Target Price of RM10.00 (17x CY22 P/E).
  • See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
  • Note that we only peg Top Glove to its current 5-year mean in spite of the current favourable operating environment and robust earnings prospects as we acknowledge that FY21 could be a one-off exceptional year.
  • Nevertheless, we continue to like Top Glove as it is the key beneficiary of higher glove demand owing to COVID-19 given its position as the world’s largest glove maker.
  • Potential re-rating catalysts include:
    1. swift resolution of the CBP ban placed on two of Top Glove’s subsidiaries,
    2. better-than-expected demand for gloves, and
    3. higher-than-expected increase in selling prices.
  • Downside risks: discovery of a cure/vaccine for COVID-19, stiff pricing competition, and a spike in raw material prices.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-10-07
SGX Stock Analyst Report ADD MAINTAIN ADD 10.000 SAME 10.000