This article first appeared in The Edge Malaysia Weekly, on January 4 - January 10, 2016.
SHAREHOLDERS of Top Glove Corp Bhd have plenty of reasons to celebrate this new year. The world’s biggest glove manufacturer has delivered yet another record profit and its share price has risen 200% since the beginning of 2015, making it the top performer among its peers.
Since Dec 31, 2014, Top Glove’s (fundamental: 2.70; valuation: 1.10) share price has tripled to RM13.58, giving it a market capitalisation of RM8.47 billion. With that, the company has overtaken Kossan Rubber Industries Bhd and become the second largest locally listed glove maker in terms of market capitalisation.
During the same period, Kossan’s (fundamental: 2.10; valuation: 1.10) share price more than doubled to RM9.30, giving it a market capitalisation of RM5.95 billion (see Table 1).
Hartalega Holdings Bhd (fundamental: 2.30; valuation: 0.50) and Supermax Corp Bhd (fundamental: 1; valuation: 0.50) also saw their share prices increase 69% and 93%, giving them a market capitalisation of RM9.75 billion and RM2.17 billion respectively.
It is worth noting that Top Glove is currently trading near its consensus target price of RM13.73. In other words, the counter may see a potential upside of only 1%.
Opinions are divided over whether Top Glove’s share price rally still has legs. Analysts tracking the company are expecting more updates from its founding chairman Tan Sri Dr Lim Wee Chai and its managing director Lee Kim Meow at a post-1QFY2016 results briefing on Jan 6.
For its first quarter ended Nov 30, 2015 (1QFY2016), Top Glove’s profit before tax came in at an all-time quarterly high of RM161.3 million, up 173% year on year. Net profit rose 163% to RM128.9 million, representing 46% of the full-year net profit achieved in FY2015.
Sales volume for 1QFY2016 hit a record high, rising 15% y-o-y and pushing its quarterly revenue to a new high of RM800.3 million (up 41% y-o-y).
In FY2015, Top Glove posted a net profit of RM280 million on revenue of RM2.51 billion.
According to Bloomberg, 14 research houses have a “buy” call on Top Glove and five have a “hold” recommendation. Two others have a “sell” call.
It has not gone unnoticed that the counter has risen above some target prices but has yet to test the higher levels, including Macquarie’s target price of RM16.70, TA Securities’ RM15.80 and AllianceDBS Research’s RM14.20. With such high target prices, it means that the stock still has an upside potential of 5% to 23% (see Table 2).
When contacted, RHB Research analyst Wong Cheng Horng acknowledges that the valuations of glove makers are getting higher. But this, he says, has become a “new normal”, considering the export-based industry is the prime beneficiary of the current exchange rates.
“If we look at Top Glove’s year-to-date performance, it may appear scary. But bear in mind that the stock had been a laggard in the past,” Wong tells The Edge over the phone.
Generally, he says, the glove sector remains attractive in terms of its earnings’ proposition, as 90% of the manufacturers’ revenue is US dollar-denominated.
He adds that he does not foresee a correction in the sector’s valuation as the ringgit, which has a close relationship with crude oil prices, is likely to remain weak.
At the moment, RHB Research maintains a “buy” call on Top Glove with a target price of RM13.82. Wong says he may revisit the rating after the results briefing.
In a Dec 15 report, Maybank IB Research says Top Glove’s valuation is undemanding, considering that it is now the sector’s new bellwether and yet cheaper than its big-cap peers, namely Hartalega and Kossan.
Besides, its one-for-one bonus issue, which is slated for completion in mid-January, could provide an “additional impetus” to the share price, it says. The research house has a “buy” call on Top Glove with a target price of RM16.60.
In another report on the same day, CIMB Research says the key potential rerating catalysts for Top Glove include sustainable margin expansion as shown in its latest results and improving liquidity from the upcoming bonus issue. It maintains an “add” rating on the stock with a higher target price of RM16.
In a separate note, HLIB Research says it is raising its target price for Top Glove from RM10.98 to RM16.38, based on an unchanged price-earnings ratio (PER) of 19.9 times, which is above its three-year historical average PER. The research house opines that the higher PER is justifiable given that the company will benefit from a stronger US dollar, lower raw material prices and improved production efficiency.
Meanwhile, AllianceDBS Research says Top Glove is best positioned among its peers to capture currency gains as it is most exposed to the natural rubber glove segment, where competition is less intense due to modest incoming supply. The research house maintains a “buy” call on the counter with a higher target price of RM14.20.
However, not everyone is optimistic about Top Glove’s outlook. For instance, JP Morgan Securities is “neutral” on the counter, giving it a target price of RM9.30. The research house says the key downside risks are a reversal in ringgit weakness, pricing pressure in the nitrile segment and negative volume growth in the latex segment.
MIDF Research has revised its target price to RM13.01, but maintained its “neutral” call on the stock. “Although Top Glove has been benefiting from the rising US dollar, our economist expects end-2016 to see a lower rate, at RM3.90 per US dollar. As such, we are anticipating a more tapered growth in the next financial year,” it says.
Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.
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