This article first appeared in The Edge Malaysia Weekly, on May 30 - June 5, 2016.

THE share price of the world’s biggest glovemaker, Top Glove Corp Bhd, has dropped 23% year to date, despite reporting an 87% jump in 2QFY2016 on March 16. The current price could offer an attractive entry point for investors keen to gain exposure to the export-oriented glove sector.

Commanding a global market share of 25% — with a 65:35 product mix in latex (natural rubber) and nitrile (synthetic rubber) gloves — Top Glove plans to raise its production capacity by 17% or 7.8 billion pieces to 52.4 billion gloves by end-February next year, with a targeted 60:40 latex and nitrile mix.

Earlier this month, the US dollar rebounded and breached the psychological level of 4.0 to the ringgit. Top Glove, a beneficiary of a stronger greenback, rose 23 sen or 4.6% this month from RM4.96 to close at RM5.19 last Wednesday.

Looking beyond short-term volatility in external factors, such as forex and material costs, long-term earnings growth will be driven by capacity expansion to cater for the growing global demand in healthcare services, particularly in developing markets.

Maybank Investment Bank analyst Lee Yen Ling says in a recent note to clients that the market has yet to fully recognise Top Glove’s bellwether status, considering that it is one of the most profitable glovemakers,  and yet, still cheaper than its big-cap peers. The research house has a RM6.50 target price on Top Glove — its only “buy” in the sector.

Sitting on a net cash position of RM337.4 million, management is actively looking for one or two M&A opportunities in higher-margin speciality gloves or even chemical and packaging manufacturers by end-2016. It has proposed a secondary listing on the Singapore Exchange by way of major shareholders selling S$20 million worth of shares to raise liquidity.

According to Bloomberg data, 14 of the 22 analysts tracking the stock have a “buy” call while three have a “sell” call. Although the consensus target price dropped to RM6.23, even as the ringgit regained strength in the first quarter, it still implies a decent 20% upside potential.

Aggressive investors who wish to have a cheaper alternative to the stock can consider CIMB Bank-issued structured warrant, TOPGLOV-C6, which has a five-to-one conversion ratio, RM5.15 strike price and expires on Feb 18, 2017. At 13.5 sen, the derivative was trading at a 12.2% premium to the underlying security.

If Top Glove rises 20% to reach its consensus target price of RM6.23, TOPGLOV-C6 should theoretically be worth 60% more at 21.6 sen, assuming a zero premium to the mother share. 

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