Broker's take: Top Glove's ESG risks to fall on strong balance sheet, automation investments, says Maybank KE

GLOVE maker Top Glove Corporation might be under the spotlight now for environmental, social and governance (ESG) risks, but such risks should fall over the years, Maybank Kim Eng (Maybank KE) said.

The company is "leading the sector in establishing policies to mitigate these risks", analyst Lee Yen Ling said in a report.

"In our view, ESG risk should fall over the years as it leverages its strong balance sheet and invests in automation to reduce its labour dependency."

In mid-July, the US's Customs and Border Protection (CBP) unit issued two Top Glove subsidiaries with a detention order on imports, also known as a Withhold Release Order (WRO). Ms Lee notes that since then, certain improvements have been made - including a payment of RM136 million to its 11,300 migrant workers or 90 per cent of its total factory workers, as well as the enlargement of workers' space at the hostels to comply with Malaysia's new minimum standard.

Social issues for the company also came under the spotlight when Malaysian authorities raided its factory two days before the US decision on the grounds that the company had flouted movement control orders such as social distancing at the workplace and had cramped accommodation for workers. In response, Top Glove said it has continuously upheld good labour practices and complied with requirements of labour laws and best practices.

For now, Ms Lee anticipates that the WRO could be lifted by end-2020 as the company appears to have "met all the expectations of the US CBP, save for the remediation fees" which are underway.

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"In the meantime, the gloves produced have been diverted to other markets and thus, there was no significant impact on Top Glove's sales volume," she added.

For now, the brokerage appears to think that Top Glove has ticked the boxes on all three ESG components.

On an environmental front, Ms Lee highlighted Top Glove's targets for reducing electricity consumption by 14 per cent and gas consumption intensity by 21 per cent by FY2024, through investments in solar powered systems and improvements in manufacturing processes.

The group also has targets to reduce water consumption intensity by 12 per cent by FY2024 through its reverse osmosis water treatment plant, as well as reduce generation of scheduled waste by 5 per cent by FY2029 to comply with Malaysia's Department of Environment's requirements and maintain its quality at Standard B.

As far as social issues go, Top Glove has implemented a zero cost recruitment policy since 2019 to ensure that its migrant workers are not charged recruitment fees and not in debt bondage.

In line with Malaysia's labour law, Top Glove's workers do not perform overtime of more than 104 hours a month and are given one rest day a week, and also receive a monthly take-home pay that is RM1,600, higher than the minimum wage of RM1,200 under the laws.

Meanwhile, Top Glove's board consists of 12 members, out of which seven are independent non-executive directors, meeting the minimum requirement of 50 per cent. The company also has five female directors on the board, and at 42 per cent of the board's constitution this surpasses the minimum requirement of 30 per cent. Ernst and Young has also been the company's external auditor for more than 15 years.

On the whole, Ms Lee noted that Top Glove "complies with the international ESG standards", and remains "committed to improving its workers' welfare" with "good corporate governance" in place.

"Given that Top Glove is the world's largest rubber glove manufacturer and the entire industry faces the same ESG challenges, we expect Top Glove to pass on the rising compliance cost," she said.

For its fourth fiscal quarter ended August, Top Glove booked record profit and revenue figures amid a surge in demand for gloves, with net profit rising 1,646 per cent to RM1.29 billion (S$422.1 million). Quarterly revenue, too, increased 162 per cent to RM3.1 billion amid strong demand growth in Asia, Western Europe and Eastern Europe.

The brokerage has reiterated its "buy" rating on Top Glove Corporation with an unchanged target price of RM9.53, representing an upside of 17 per cent for the Malaysian glove maker.

As at 11.21am, Top Glove shares which are dual-listed in Singapore and Malaysia, are trading at S$2.88 on the Singapore bourse, up 0.35 per cent or one Singapore cent.