KLK’s recruitment issues to be short-lived, say analysts

KUALA LUMPUR: The fallout from recent allegations regarding Kuala Lumpur Kepong Bhd’s (KLK) recruitment agency in Nepal is likely to be contained, says analysts, as the group works towards avoiding further escalation of the issue.

A report from Nepal-based news group Sajha Sabal Media alleged that SOS Manpower Services (SOS), a recruitment service in Nepal, has been involved in unethical recruitment practices.

SOS is engaged by KLK subsidiary KL-Kepong Rubber Products Sdn Bhd (KLKRP) to recruit workers in Nepal via a Malaysian agent, Agen Perkerjaan UKHWAH Sdn Bhd.

In response, KLK appointed a Big 4 accounting firm as an independent third party to examine the claims and provide an unbiased assessment on the case.

Kenanga Research said in a company update it expects the impact of the situation to be limited even in the event of a worst-case scenario given that KLKRP is the group’s glove manufacturing arm, which does not involve its upstream plantations unit.

In addition, the group only employs 160 Nepali workers out of its total workforce of 60,000. While another 140 Nepali workers were due to arrive, the recruitment has been temporarily halted pending the inhouse investigation and independent third-party assessment.

Kenanga added that KLK has improved guest workers recruitment as well as their working and living conditions following controversy in 2018-19 involving some Malaysian glove manufacturers.

Separately, RHB Research said the negative news flow is expected to affect sentiment, but will be short-lived.

“We believe that, with KLK addressing the issues head on and publicly, it should help avoid further escalation. To that end, RAM Ratings has already issued a statement saying that KLK’s credit and sustainability ratings are intact,” it said.

In the same vein, TA Securities Research said it believes the share price is unlikely to be impacted by the allegations.

However, it added that should the forced labour allegations escalate and be tied back to the palm oil business, the group could face penalties through ESG ratings, which would result in investors shying away from the stock until further clarity.

Hong Leong Investment Bank (HLIB) Research concurred there could be risk to the group’s ESG rating.

“While we applaud KLK’s swift response and actions in addressing the abovementioned issue, these allegations (if it turns out to be true) will likely affect KLK’s ESG profile, hence share price sentiment,” said the research firm.

HLIB maintained its “buy” call on KLK with an unchanged target price of RM24.41.

TA Securities reiterated its “sell” call on KLK with an unchanged target price of RM21.50.

RHB kept its “buy” call and target price of RM25.80.

Kenanga also stayed cautious on KLK with a “market perform” recommendation and target price of RM23, based on headwinds to its downstream earnings.