August 05, 2021

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Top Glove (Q3 FY21) Results Update

Picture Source : The Star

Coming into this quarterly reporting, there were many rumours surrounding Top Glove performance. On the extreme ends, there were those who said Top Glove results is badly impacted from CBP Ban resulting them unable to deliver half of what they did last immediate quarter. On the other hand, there are those who believe the ASP has plunged so much the profit margin would be eroded to below 30%.

Looking at the results, indeed Revenue have fallen close to 23% from immediate preceding quarter (Q2 FY 21) whilst Net Profit have fallen almost 29%. This is due to 2 major reasons - 1. fall in total volume sold by 9% and 2. ASP decline from its peak in February 2021. The CBP Ban did in fact cause major damage to Top Glove as it directly hurt the company's ability to sell into US market. I strongly believe, if not for the US CBP Ban, Top Glove results this quarter would come close to RM 2.3-2.4B.

After a quick summary of the results above, the question is whether is the results considered good, bad or mediocre? Well, I must give credit where credit is due. Top Glove paid the ultimate price where their labour issues have caused them to suffer the impact of the US CBP Ban. Despite so, Top Glove management have shown resilience and the right approach worthy of respect towards addressing all the shortcomings. Whether rightly, fairly or objectively scrutinized, there is always a price to being the biggest Glove manufacturer in the world.

From Top Glove's results I may not like the fall in volume sold, decline in ASP although expected, but I like how the management have kept to their promise to maintain strong dividend payouts to shareholders at 71% ratio bringing this quarter's dividend payment to 18 sens which is even higher than Q1's 16.5 sens (where the net profit then was RM 2.35B higher than current quarter). At this current price of RM 4.80, the dividend yield in a single quarter alone is 3.75%. This shows that Top Glove takes care of their shareholders. Additionally, the balance sheet remains extremely strong with a net cash position of close to staggering RM 4.23B. This is a war chest that can last Top Glove for years to come and if used prudently, will allow them to grow further.

Despite much lower revenue compared to earlier quarter, Top Glove was able to maintain a strong 49% profit margin which shows efficiency and economies of scale. Another thing I like is how the management placed a lot of effort in highlighting their ESG steps taken breaking it down in the report itself for investors. I hope swift action follows and will continue.

Market consensus was expecting around RM 2.3-2.5B, so Top Glove results did fall short of consensus. However, the dividend exceed expectations and most importantly, the current market share price has already factored in the weakness.

What remains then of Top Glove's future catalyst? In my view, there are primarily 2 catalyst left.

1. The resolution of US CBP Ban

2. Market investors / funds ability to value the glove companies fairly and objectively to its true valuation taking into account of retained earnings, balance sheet strength and exponential earning potential whilst ignore the near term weak investor sentiment driven by Covid-19 resolution outlook.

So is Top Glove results still good? Well, Top Glove results did come in above Public Bank but fall short of Maybank & CIMB (which had revaluation gain) in this round of earnings report. In my view, it is impressive by any measure.

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Cashflow Is The Lifeline Of A Company
 

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