Hospitality, aviation, retail, and food and beverage industries are the industries most affected by the Covid-19 pandemic. 

However, there are opportunities in every crisis. Some sectors are less affected and, on the contrary, witnessed higher sales since the start of the virus outbreak. The medical supplies and glove sector is one such example. 

In this article, we shall look at Top Glove Corporation Bhd (SGX: BVA, KLSE: TOPGLOV) latest earnings, business performance, and future growth plans.   

Business Overview 

Top Glove is the world’s largest manufacturer of gloves by volume. It has 44 manufacturing plants in Malaysia, China, and Thailand, with a capacity to produce up to 73.4 billion pieces of gloves per year.

The group’s products are sold worldwide to more than 190 countries, among which North America is the largest market with a 27% share, followed by Western Europe and Asia ex-Japan with around 15% each. 

Almost 50% of sales revenue comes from nitrile gloves. Due to its better quality with a lower occurrence of tearing, nitrile glove’s share of sales had been consistently rising since 2011. Latex gloves that are made of rubber, take up 39% of total sales. However, its share of total revenue had been shrinking due to falling demand. 

Source: FY2019 Annual Report

Latest Financials 

Top Glove’s achieved RM1.23 billion in the second quarter of Financial Year 2020, a 6% growth over the same period the previous year. The group had broad-based growth across its operating and pre-tax profit as well, which rose 2.8% to 3.9% over 2020. 

Operationally, Top Glove sold more gloves in the quarter. In particular, the nitrile glove segment saw 14% more in sales quantity. However, rubber glove sales quantity was 6% lower. 

Raw material prices were a mixed bag, with natural rubber and nitrile latex price increasing 19% and decreasing 8.3% respectively. Hence, the operating margin had a mild drop to 12.1% compared to 12.5% in the previous year. 

Group financial highlights. Source: 2Q 2020 earnings statement

Historical Earnings

It is hard not to be impressed by Top Glove’s historical revenue and earnings growth trend, as the group registered a consistent growth in both the top line and bottom line. 

As seen below, revenue shows a consistent uptrend from 2014 to 2019 with a compounded annual growth rate of 16%. Profit before tax, while not increasing each year, also showed good compounded growth of 14% annually. 

Return on equity ranged between 13.1% to 19.3%. For a manufacturing company with substantial assets in plant and equipment, a mid-teens return on equity figure is commendable. 

Source: 2019 Annual Report

Gearing Trend

The group’s cash level had been higher in four of the last six years, giving rise to a strong balance sheet with net cash. 

Top Glove took on more borrowings in the last two years due to expansion in production capacity and acquisition of Aspion, a leading surgical glove manufacturer.  

Source: Self-compiled from Annual Reports

Dividends Track Record

Top Glove has adopted a dividend policy of paying half of its profit after tax and minority interest as dividends. Hence, investors have seen the group’s dividend expanded from RM4 cents to RM7.5 cents in 2019. 

Source: Self-compiled from Annual Reports

Strengths and Opportunities

As the world’s largest glove manufacturer, Top Glove enjoys strong economies of scale that enable the group to optimise its cost structure. This can be done in several ways such as purchasing raw materials at lower prices, negotiating for better credit terms, and better utilisation of technical expertise and machinery. As a result, Top Glove has a superior 15.6% average margin in the past six years.

Source: Self-compiled from Annual Reports

There has been a growing glove demand globally due to increased health spending and rising level of awareness on personal hygiene. The group had been able to steadily expand its production line to capture a larger market share, as seen from its constantly-rising revenue. 

Top Glove expects the Covid-19 outbreak to further boost glove demand not just from the healthcare sector, but also from other industries requiring more medical supplies and other essential items. The group has received strong demand initially from Asia, and more recently from Europe and the US which has doubled its sales order book. 

Top Glove would be able to capitalise on this surge of demand as there will be an expansion of production capacity with 70 new production lines starting operation in 2020.  

Weakness

Top Glove is a popular stock as investors are happy with its business performance thus far, and expecting similarly strong growth in the future. Such expectation has pushed its share price to an expensive valuation. Based on RM0.14 earnings per share last year and the current share price of $2.34 (S$1 = RM3.05), the share is trading at a high price-earnings ratio of 51 times. 

Management and Shareholding

Tan Sri Dr Lim Wee Chai founded Top Glove in 1991 and is currently leading the company as its Executive Chairman. He is a well-respected figure in Malaysia’s business facility. After all, founding a company and growing it into the biggest player in its field with a 27% global market share is no mean feat. 

Dr Lim holds a 26% direct stake in the company’s shareholding. With substantial ownership in the company, I do expect a strong alignment of interest between minority shareholders and Dr Lim. 

Conclusion

Glove is an essential medical supply for the healthcare industry that has an inelastic demand. I believe its market will be further bolstered due to the coronavirus pandemic, giving Top Glove favourable market conditions for future growth. 

However, investors need to be aware of its high valuation. As with growth stock with a high price-earnings ratio, a lot of growth expectations are baked into the share price. Should growth fail to materialise, it is very likely for the share price to tumble.

Hence investors would need to weigh the growth potential and Top Glove’s share expensive valuation carefully.  

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