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KUALA LUMPUR (September 17): Top Glove Corp Bhd will turn heads today, as the world’s largest manufacturer of rubber gloves will release its quarterly and annual earnings.
The market expects Top Glove to announce a quarterly net profit of no less than RM1 billion for the fourth financial quarter ending August 31, 2020 (4QFY20). It will be the largest quarterly net profit in history supported by the increase in the average selling price (ASP) of disposable rubber gloves coupled with strong demand growth due to the Covid-19 pandemic globally.
Group CEO Tan Sri Lim Wee Chai already hinted last Friday that Top Glove will deliver stellar financial results for the financial year ended August 31, 2020 (FY20) and FY21.
“Our prospects and the glove industry remain promising. Global glove demand is growing steadily from 10% to 12% annually driven by strong market fundamentals,” Lim said in a note posted on the official website. from the company last week. as a message to stop the recent drop in Top Glove’s share price.
The group’s shares rallied to RM8.43 on Tuesday, up 30% from a low of RM6.45 last Thursday.
In addition to the stellar set of earnings investors are looking forward to, there are still issues waiting for Lim to address as Top Glove’s share price rises further.
1. Vaccine, a brake on the demand for gloves?
The increase in the use of waste gloves around the world is mainly due to the pandemic. Does Lim expect the current high demand for rubber gloves to be affected by the availability of vaccines, which will be more effective in containing the spread of the virus?
The race to develop a Covid-19 vaccine continues globally. The latest news is that the coronavirus vaccines being developed in China may be ready for use by the general public from November, according to the Chinese Center for Disease Control and Prevention (CDC).
China has four Covid-19 vaccines in the final stage of clinical trials. At least three of them have already been offered to essential workers under an emergency use program launched in July.
2. Glove storage
Are existing strong orders the result of stock build-up by distributors amid concerns about supply shortages?
If demand is partly driven by storage, this could mean glove manufacturers are producing for future consumption far ahead.
On the other hand, hospital operating rooms have not been busy most of the time since the pandemic. It is a worldwide trend for people to postpone elective procedures that are not life threatening. Many private hospitals are suffering from low activity.
Lim may want to enlighten the investment community on the details of the demand pattern going forward. In short, how sustainable is the current strong demand that has pushed Top Glove’s earnings to over RM 1 billion? What would the demand pattern look like in the next 18 months?
3. New entrants, a cause of excess supply
For the past four months, there has been a rush to enter the rubber glove industry.
These new players, for example Inix Technologies Holdings Bhd and AT Systematization Bhd, are setting up plants that plan to start production next year to help meet the strong anticipated demand.
Rome was not built in a day. Could rubber glove plants be built in months, allowing new entrants to take advantage of today’s strong demand?
Are the new facilities built to produce rubber gloves causing any concern to the incumbents, who are also expanding their capacity aggressively?
4. Will the US Customs arrest warrant be revoked before the end of the year?
Two months have passed since the United States Customs placed an arrest warrant on the rubber gloves produced by the group’s two subsidiaries, namely Top Glove Sdn Bhd and TG Medical Sdn Bhd, on July 15.
On September 7, Top Glove said that it submitted an audit report to the US Customs and Border Protection (CBP), in relation to the alleged forced labor issue brought against the glove manufacturer.
WRP Asia Pacific Sdn Bhd was another Malaysian glove manufacturer that was previously on the arrest list on September 30 last year. The arrest warrant was revoked after six months.
The North American market represents at least a quarter of the group’s sales volume. In his last message, Lim indicated that the group has received requests for a year in the pipeline. Do these orders include shipments to the US?
Lim will have to shed some light on the impact of the US arrest warrant thus far and the realistic timeline for the group to resolve the issue.
5. Problems of migrant workers
The group has earmarked RM3 billion for capital expenditures to build 450 new lines, which will generate a new capacity of 60 billion pieces of gloves from 2020 to 2026.
Currently, Top Glove has 46 factories and 724 production lines with an annual capacity of 85.5 billion pieces of gloves.
While Top Glove is expanding its capacity to cope with the increasing demand, does the group have enough manpower in your factory?
Given the government’s effort to reduce reliance on foreign workers, the investment community would like to hear about Lim’s plans to make Top Glove’s production process less labor-intensive.
Given the group’s earnings are expected to be on the fast-growing track, will Top Glove invest more money in automation, a move away from the labor-intensive business model?
6. Share buyback program
Top Glove spent RM210 million in three trading days to buy back shares on the open market when the shares sold strongly.
The amount is equivalent to 60% of your net profit in 3TFY20.
However, its move has attracted attention simply because its current share price is relatively high compared to six months ago despite the recent slide. So far this year, the meter has increased by 440%.
The group’s cash stock is expected to grow rapidly as a result of strong glove sales. Investors would like to know how the group would use the huge amount of cash. Will there be more special dividends in the pipeline, as Top Glove is willing to spend on share buybacks when its share price remains high?
Bullish analyst forecasts
Top Glove posted its best results in 3QFY20 with a net profit of RM347.9 million, an increase of more than four times from RM74.67 million last year. This beat earnings per share to 13.59 sen compared to 2.92 sen previously.
Quarterly revenue increased nearly 42% to RM1.69 billion, which also marked the strongest quarterly top line since RM1.19 billion in 3QFY19.
The stellar performance was thanks to “unprecedented growth in sales volume,” the group had said in its presentation to the stock exchange.
Only the third quarter accounted for 94% of the net profit for fiscal year 2019 of RM370.56 million. Before this, its highest quarterly net profit was RM128.35 million in 1TFY16.
As such, analysts anticipate another record performance in the fourth quarter ended August 31, 2020.
In a recent note dated September 8, CGS-CIMB said that it expects Top Glove to post a historical high net profit of between RM1 billion to RM1.1 billion in 4QFY20 based on its forecasts, which would mark the first billion of net earnings achieved in a single quarter.
This in particular would be supported by higher ASPs, which are expected to be reflected in the coming quarters, along with additional new capacity coming online on schedule, and better economies of scale, CGS-CIMB said.
“Top Glove expects further ASP increases for nitrile gloves at 20% per month (month to month) in September and October, and potentially another 10% per month in November 2020.
“Additionally, Top Glove also expects ASPs for latex gloves to increase by 5% in September and October. This is also compatible with [them] It recently received more spot orders through the end of 2020 as it expects to allocate up to 30% of its total capacity for spot orders in the future, ”said CGS-CIMB.
Malacca Securities Sdn Bhd analyst Kenneth Leong agrees, saying the next quarter is expected to post strong earnings with double-digit growth on a quarterly basis, driven by an increase in ASPs.
However, he noted that Top Glove’s peak earnings have yet to come, adding that he expects the next following quarter to see even stronger earnings.
As demand is expected to grow globally, Top Glove has said it will continue to expand its capacity to ensure it is well positioned to meet global glove demand, which is expected to grow 12-15% annually in compared to the 8% to 10% rate pre-Covid-19.
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