October 16, 2021

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Top Glove Results Update (Q4FY21) & Management Briefing

Top Glove latest results may have come to a surprise to many as its revenue halved QoQ to RM 2.1B and Net Profit fell below RM 1B to RM 607M. The reasons were predominantly due to three factors :

1. There were no sales to US from April 2021 which forms 15% of Top Glove income contribution.
2. ASP and volume were impacted.
3. Production loss from MCO and EMCO for more than 1 month

Balance sheet remain strong with net cash of RM2.05B. Capacity currently stands at 100 Billion. The recent dividend payout ratio is 71% (current QR is 5.4 sens,) and total to date is 65 sens. One interesting figure I noticed from the corporate presentation, in light of the windfall levy debate, Top Glove has paid RM2.1B in corporate income tax.

Negatives or concerns from the briefing :

1. Top Glove result did not hit close to the forecasted RM10B due to the impact from CBP and MCO. This impacts its fair value downwards.

2. ASP will normalise by January 2022, in line with Hartalega's AGM briefing.

3. Will observe China, Thailand and Vietnam expansion closely to see if it threatens Malaysia's manufacturers market position as during good times, everyone wants to expand.

4. Demand is lesser from major glove markets that stocked up significantly in 2020.

Positives from the briefing

1. CBP Ban lifted, Top Glove is back in business for US markets and will ship out as soon as end September and resume to normality in October.

2. Raw material cost expects to fall which would help with the cost structure.

3. New entrants are no threat to the old boys due to Quality issues and higher cost base. It is buyers market and not sellers market like 2020. Hence, customers will not easily choose unproven suppliers with little experience or track record.

4. Believe Malaysia holds the advantage in terms of infrastructure, technology, cost efficiency compared to China and other markets.

5. Demand is more from markets that did not stock up in 2020 and good healthy sign from Latin America, Asia-ex Japan and Africa.

6. Covid-19 is endemic and hygiene awareness cause structural step up hence demand expected to continue to grow and buyers of gloves will continue to buy.

The questions most investors would like to know is whether has the full negativity factored into the share price? What is the actual valuation of the business?

Ultimately, how much a company is worth is based on its intrinsic value. Its intrinsic value is based not only on its earnings but the overall balance sheet, management and growth potential. A good indication is to look at the company's EV/EBITDA multiple to assess its true valuation. By doing so, one would be less worried about fluctuation in share price. Analysts reports are never long term but mostly immediate. So investors need to decide if they want to be long term or short term investors.

Also it is necessary to assess if the company can continue to command its market position, and in turns earnings in the future. An interesting point stated by Chairman of Top Glove is due to the speed of transmission of information, market cycles aren't as long as what it used to be. In the past it was 5-10 years. Now it may be 2-3 years. In my humble view, the worst is likely over with the CBP Ban lifting. Customer retention is key for them and importantly, Top Glove must emerge as a better company following this painful lesson. I believe it can.


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Author of "Once Upon A Time In Bursa", please click MPH Bookstore / Popular Bookstore / Shopee

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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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