How much profit do glove makers need to sustain rally?

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KUALA LUMPUR (Aug 6): Based on historical valuation, which investment analysts said has been thrown out of the window by now, the glove manufacturers are trading at price-earnings ratio of more than 100 times.  

Top Glove is currently the second largest company by market value in Bursa Malaysia, followed by Hartalega as the third biggest. Only Malayan Banking Bhd (Maybank), the country’s biggest bank in asset size, is more valuable than the two glove manufacturers.

Interestingly, even Supermax Corp Bhd and Kossan Rubber Industries Bhd are already among the top 25 largest firms in terms of market value in the local bourse. Supermax is 16th and Kossan 21st.  

Against the backdrop of anticipated exceptionally strong demand for disposable rubber gloves due to the Covid-19 pandemic coupled with a big jump of 30% in average selling price, investors are pouring money into glove manufacturers with high hope that they will churn not just profits in current harsh economic conditions but super profits.

Investment analysts have been raising earnings forecasts as the meteoric rally continues and the glove stocks surpass initial target prices.

As the glove companies are due to release their financial results soon. How much earnings do they need to deliver to sustain their currently high share price levels?

According to Bloomberg data, earnings consensus for Top Glove’s financial year ending Aug 31, 2020 (FY20) is a record high of RM1.44 billion and a whopping increase to RM3.81 billion the year after.

A back of envelope calculation, on a simple average, Top Glove would need to achieve RM866 million in net profit in the quarter ending Aug 31 - a 149% jump from the preceding quarter to meet market expectations.

This is more than four times the quarterly net profit of Nestle (M) Bhd for the financial quarter ended March 31, 2020.

Hartalega announced its record high net profit of RM219.72 million in the first financial quarter ended June 30. But the stellar set of financial results did not add fuel to its share price rally as it fell short of market expectations.

Still, analysts upgraded earnings forecasts noting that profit margin will be wider as a result of higher average selling price in upcoming quarters. In short, analysts are of the view that the exponential growth has yet to kick in.  

Market consensus forecast Hartalega's annual profit went up to RM1.61 billion for the financial year ending March 31, 2021. This means that Hartalega's 1QFY21 net profit only accounted for 13% of the full-year earnings consensus.

To meet the market consensus, Hartalega will need to achieve an average of RM479 million in each of the three upcoming financial quarters. This translates into average earnings growth of 346% y-o-y.

Likewise, Supermax and Kossan are expected to see a 260% and 207% q-o-q growth respectively this coming quarter to meet their earnings consensus.

Supermax’s market capitalisation is currently at RM31.28 billion. Assuming a P/E ratio of 25 times, which is considerably high for the manufacturing sector, Supermax needs to make an annual net profit of RM1.25 billion, or an average quarterly profit of about RM312 million. Meanwhile, Kossan Rubber is expected to deliver annual net profit of RM974 million, averaging RM243.5 million in each quarter.

What about the smaller players?

Similarly, based on the P/E of 25 times, for Comfort Glove Bhd to justify the current market capitalisation of RM3.78 billion, it will have to make an annual net profit of RM151.56 million.

Rubberex Corp Bhd’s market value has swelled to RM1.881 billion. At the P/E valuation of 25 times, the glove maker is expected to achieve annual net profit of RM75.24 million, or RM18.8 million a quarter.

Over at Careplus, its market capitalisation is at RM2.918 billion. To justify a P/E ratio of 25 times, the company needs to churn an annual net profit of RM87.92 million - an amount that is almost equivalent to its market value a year ago of RM85 million.