KUALA LUMPUR (Sept 17): Top Glove Corp Bhd will hog the limelight today as the world’s largest rubber glove maker will release its quarterly and annual earnings.
The market is expecting Top Glove to announce a quarterly net profit of no less than RM1 billion for the fourth financial quarter ended Aug 31, 2020 (4QFY20). It will be the largest ever quarterly net profit supported by the increase in average selling price (ASP) of disposable rubber gloves coupled with strong demand growth due to the Covid-19 pandemic globally.
The group’s executive chairman Tan Sri Lim Wee Chai last Friday already hinted that Top Glove will deliver stellar financial results for the financial year ended Aug 31, 2020 (FY20) and FY21.
"Our prospects and the glove industry remain promising. Global demand for gloves is growing steadily at 10% to 12% per annum driven by strong market fundamentals,” Lim said in a note posted on the company’s official website last week. The comment was seen as a message to stem the recent sharp fall in Top Glove’s share price.
The group’s shares rebounded to RM8.43 on Tuesday, up 30% from the low of RM6.45 last Thursday.
Besides the stellar set of earnings that investors are looking forward to, there are still issues awaiting Lim to address while Top Glove’s share price climbs further.
1. Vaccine, a curb on glove demand?
The surge in disposal glove usage worldwide is mainly driven by 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 to contain the spread of the virus?
The race to develop a Covid-19 vaccine is ongoing globally. The latest news is that coronavirus vaccines being developed in China may be ready for use by the general public as early as November, according to 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 those have already been offered to essential workers under an emergency use programme launched in July.
2. Stockpile on gloves
Is the existing strong orders the result of stockpiling by distributors amid concerns on supply shortage?
If the demand is partly driven by stockpiling, this might mean that the glove makers are producing for future consumption far ahead.
On the other hand, operating theatres in hospitals are not occupied most of the time since the pandemic. It is a global trend that people are postponing elective procedures that are not life threatening. Many private hospitals are suffering from low activities.
Lim may want to enlighten the investing community on the details of the demand pattern moving forward. In short, how sustainable is the current strong demand that has driven Top Glove’s earnings to above RM1 billion? How would the demand pattern be like in the coming 18 months?
3. New entrants, a cause of oversupply
Over the past four months, there has been a rush to enter the rubber glove industry.
These new players, for instance Inix Technologies Holdings Bhd and AT Systematization Bhd, are setting up plants planning to start production next year to help fulfil the anticipated strong demand.
Rome wasn’t built in a day. Could rubber glove plants be built in months enabling the new entrants to tap onto the current strong demand?
Do the new facilities built to produce rubber gloves cause any concerns to the incumbents, who are also expanding their capacity aggressively?
4. Will US Customs detention order be revoked by year-end?
It has been two months since the US Customs has imposed a detention order on rubber gloves produced by the group’s two subsidiaries, namely Top Glove Sdn Bhd and TG Medical Sdn Bhd, on July 15.
On Sept 7, Top Glove said it has submitted an audit report to the US Customs and Border Protection (CBP), in relation to the alleged forced labour issue filed against the glove maker.
WRP Asia Pacific Sdn Bhd was another Malaysian glove maker that was previously placed on the detention list on Sept 30 last year. The detention order was revoked after six months.
The North American market accounts for at least one-quarter of the group’s sales volume. In his latest message, Lim indicated that the group has gotten a year’s orders in the pipeline. Do these orders include any shipments to the US?
Lim will have to shed some light on the impact brought by the US detention order so far and the realistic timeline for the group to resolve the issue.
5. Migrant workers issues
The group has earmarked RM3 billion for capital expenditure to build 450 new lines, which will generate 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 rising demand, does the group have sufficient labour on its factory floor?
Given the government’s effort to reduce the dependency on foreign workers, the investing community would want to know the plans that Lim has mapped out for Top Glove’s production process to be less labour intensive.
Since the group’s earnings are expected to be on the fast growth track, will Top Glove invest more money on automation — a move away from labour-intensive business model?
6. Share buyback scheme
Top Glove spent RM210 million in three trading days to buy back shares on the open market when the stock was under heavy selldown.
The amount is equivalent to 60% of its net profit in 3QFY20.
However, its move has raised some eyebrows simply because its current share price is relatively high compared with six months ago despite the recent drop. Year to date, the counter has jumped 440%.
The group’s cash pile is expected to grow fast as a result of the brisk glove sales. Investors would like to know how the group would utilise the ballooning cash pile. Will there be more special dividend in the pipeline since Top Glove is willing to spend on share buyback when its share price is still high?
Bullish forecasts by analysts
Top Glove produced its best-ever results in 3QFY20 with a net profit of RM347.9 million, a more than four times jump from RM74.67 million last year. This leapfrogged earnings per share to 13.59 sen compared to 2.92 sen previously.
Quarterly revenue was up almost 42% at RM1.69 billion which also marked the strongest-ever quarterly topline from RM1.19 billion in 3QFY19.
The stellar performance was thanks to “unparalleled growth in sales volume”, the group had said in its filing to the stock exchange.
The third quarter alone made up 94% of the net profit for FY19 of RM370.56 million. Prior to this, its highest quarterly net profit was RM128.35 million in 1QFY16.
As such, analysts are anticipating another record performance in 4QFY20.
In a recent note dated Sept 8, CGS-CIMB said it is expecting Top Glove to record 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 net profit achieved in a single quarter.
This in particular would be supported by higher ASPs, which are expected to be reflected in coming quarters, together with additional new capacity coming on-stream as scheduled, and better economies of scale, said CGS-CIMB.
“Top Glove expects further ASP increases for nitrile gloves at 20% m-o-m (month-on-month) in September and October, and potentially another 10% m-o-m in November 2020.
“Besides, Top Glove also sees ASPs for latex gloves increasing 5% m-o-m in September and October. This is also supported by [them] recently receiving more spot orders until end of 2020 as it expects to allocate up to 30% of its total capacity for spot orders going forward,” CGS-CIMB said.
Malacca Securities Sdn Bhd analyst Kenneth Leong concurs, saying the upcoming quarter is expected to post strong gains with double-digit growth on a quarterly basis, driven by a hike in ASPs.
However, he noted that the peak for Top Glove earnings has yet to come and adds 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 fulfil global glove demand which is expected to grow at between 12% to 15% annually compared with the pace of 8% to 10% pre-Covid-19.