Alleviation of social risks a key positive
? A social compliance audit conducted on SKP’s operations by a third-party
auditor has concluded that SKP adheres to ethical labour practices.
? The audit findings indicated that SKP fully reimbursed all recruitment fees
paid by its foreign workers and addressed issues of working overtime.
? We view this as a positive development as it should alleviate some of the
social risks plaguing the EMS sector in the past few months.
Background of the social compliance audit
? On 2 June 2022, SKP Resources announced the findings of a social compliance audit
that was run by its appointed auditor, TÜV Rheinland Malaysia (TUV), from Apr to May 2022. The audit was mainly carried out to identify if SKP engaged in any forced labour
practices as per the 11 indicators of forced labour defined by the International Labour
Organisation (ILO). TUV was also tasked to verify if all the 6 subsidiaries involved in
the audit carried out an adequate remediation programme with respect to repayment
of recruitment fees previously paid by foreign workers to recruitment intermediaries.
TUV conducted interviews with approximately 8% of SKP’s total foreign workforce. To
recap, SKP had first engaged migrant worker rights specialist Mr. Andy Hall in Dec
2021 after Mr Hall highlighted to SKP his concerns regarding SKP’s labour practices,
mainly relating to overtime and remediation of recruitment fees, which eventually led to
a collaboration between SKP and Mr Hall and the eventual appointment of TUV.
TUV confirms SKP’s adherence to ethical labour practices
? As per the audit findings published on Bursa, TUV verified that SKP fully completed its
remediation programme and reimbursed all recruitment fees paid by its foreign
workers in the past. Additionally, while TUV highlighted some minor findings regarding
working hours (overtime) and accommodation, the auditor noted SKP’s
responsiveness in providing recommendations for improvements and taking immediate
action to address these issues, all in an effort to maintain its foreign workers’ welfare.
All in all, TUV established at the end of the audit that SKP’s labour practices do not
amount to systemic forced labour and are in compliance with Malaysia’s Labour Law.
We gathered from our previous meeting with SKP that all the remediation payments
have already been reflected in SKP’s FY22 earnings.
A win for the EMS sector as far as ESG is concerned
? We view this as a positive development, not just for SKP but for the whole EMS sector,
as this should alleviate some of the social risks and negative sentiment plaguing the
sector as a result of previous forced labour allegations. We believe the audit findings
should serve as a reassurance for SKP’s existing and prospective clients as well as
the investing community regarding its adherence to ethical labour practices. We are
also positive on the transparent manner in which SKP carried out its audit as this
similarly reduces the likelihood of potential governance risks. We continue to like SKP
as it trades at attractive 13.3x/11.3x FY23/24F (c.2.0 s.d. below its 5-year mean) P/Es.
We retain our Add call and TP of RM1.89 (14.1x CY23F P/E, 1 s.d. below its 5-year
historical mean P/E). Downside risks include continued supply chain disruptions.