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KUALA LUMPUR (December 12): The latest record net profit of the world’s largest rubber glove maker Top Glove Corp Bhd exceeded RM2 billion, supported by strong demand for gloves in developed and emerging markets, thanks to the pandemic.
But behind this super profit, the group has been plagued by problems ranging from import bans in the US market to forced labor allegations, a surge in Covid-19 infections among its workers that has halted half their capacity. production facilities and possible legal action by Malaysian authorities for housing their workers in cramped and poorly ventilated accommodation that does not meet the minimum standards set by law.
Add these to the barrage of news about the imminent availability of an effective Covid-19 vaccine, it’s not surprising that Top Glove’s stock price has been dropping, despite the company’s persistent share buyback efforts to halt. the decline, with more than RM1 billion spent so far. This week, the witness to the share purchase was picked up by its founder and chairman Tan Sri Dr Lim Wee Chai, who bought Top Glove shares worth RM29.77 million.
JP Morgan started hedging its shares yesterday, but with a fair value of RM3.50, roughly half of its last traded price of RM6.90, as it sees the passage of a super-normal growth cycle for glove manufacturers. , in anticipation of a huge oversupply in the market, as glove demand slows along with the pace of testing for Covid-19. Rising costs are also expected to affect profitability.
So what does Top Glove have to say about how to maintain its super profits? Below are the written responses of its president to some questions posed by The edge after the publication of the first quarter results.
Question of The edge: Your profit margin stood at 49.9% in the first quarter ending November 30, 2020 (1TFY21). Is the current profit margin sustainable?
Response from Lim: The performance of the next few quarters will be better due to the following reasons:
1. New additional 10% capacity
2. Higher nitrile gloves are mixed by changing some latex capacity and enough NBR (Nitrile Butadiene Rubber) latex
3. Highest ASP that is in line with the prevailing market price. ASP for 2Q is expected to be 30% higher than 1TFY21
4. Demand continues to rise, supported by health and hygiene awareness
Q: Top Glove has been observed to have made share buybacks during the one-month blackout period prior to the release of quarterly results. Are companies allowed to do that under the listing rules?
A: There is no blackout period for companies to buy back shares. The blackout is for directors and top executives of the company.
Q: Will the company continue to buy back its own shares? If so, what is the budgeted amount for this exercise?
A: The company will evaluate the need for share buybacks on an ongoing basis, taking into account the share price, potential earnings and available cash.
Q: Top Glove has spent a total of RM2.5 billion to pay dividends and buy back its own shares now. What will your cash pile look like in the future?
A: The group is now in a net cash position and will continue to be in a net cash position, with an increasing trend in cash flow from operating activities, which we expect will further increase its cash position.
Q: With net cash of RM3.46 billion now, will Top Glove invest more in investment securities?
A: Investment securities are not investments in shares listed in listed companies. It is an accounting terminology for cash on hand that we place in money markets to obtain better returns than FD (fixed deposit).
Q: With its net cash position now, will Top Glove redeem the perpetual sukuk that was issued on February 27, 2020 to raise RM1.3 billion?
A: The sukuk is a long-term financing and we evaluate it for long-term cash planning purposes, when we raise the fund.
Q: Can you explain what these RM 1.09 billion contractual liabilities are on your balance sheet?
A: Are the deposits charged to customers for future orders.
Q: For Tan Sri, given that you are a substantial shareholder of Tropicana, did you know that Tropicana bought more than RM70 million shares of Top Glove recently?
A: See Tropicana’s Bursa announcement at this link. Tan Sri Dr Lim is the Non-Executive Chairman of Tropicana and was not involved in the deliberation and decision of such investment.
Q: Following solid 1TFY21 earnings of RM2.38 billion, what are your earnings expectations for 2QFY21?
A: See the answer to Question 1 above.
Q: Has there been any indication from US Customs and Border Protection as to when it will revoke the import ban on the company’s two subsidiaries? Will sales to the North American market continue to decline in 2TFY21? (1TFY21 fell 2% year-on-year)
A: We continue to actively collaborate with US Customs and Border Protection toward the rapid improvement of the Release Withholding Order (WRO), for which it is making good progress. The sales drop in North America was also due to NBR supply shortages and also to EMCO (Enhanced Motion Control Order); the next quarter should be longer due to the sufficient availability of NBR latex and new nitrile capacity.
Q: Has the company provided any sanction for violating the Minimum Standards of Housing and Services for Workers Act 1990 (Law 446)? What is the amount you expect of this?
A: Top Glove is working closely with the authorities related to this issue to ensure compliance with the Law.
Read also:
JP Morgan sets the fair value of these glove makers at up to half their market price, says the supernormal cycle is over
The turn of the president of Top Glove to buy shares of the company
Tropicana’s purchase of Top Glove shares surprises
MoHR Opens 19 Investigation Documents Against Top Glove Group Companies After Covid-19 Outbreak Among Workers
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