Case Study of Top Glove Corporation Bhd (7113)

Overview

Top Glove Corporation Bhd is an established Malaysia-based investment holding company founded in the Year 1991 by Tan Sri Dr Lim Wee Chai and Siew Bee Tong based in Shah Alam, which primarily involved as the world’s largest rubber glove manufacturer in Malaysia, specialise in both healthcare and non-healthcare segments.

TOPGLOV was listed in ACE Market in 2001 and successfully transformed into Main Market of Bursa Malaysia on 16 May 2002. The group serves a network of over 2,000 satisfied customers in more than 195 countries worldwide, and these numbers are still increasing. Their complete range of quality gloves at low efficient cost enables them to meet the needs of the company’s ever-expanding customer base.

Presently, TOPGLOV has few manufacturing operations spanning across Malaysia, Thailand and China. There are marketing offices in these countries as well as USA, Germany and Brazil.


Business Model

Top Glove Corporation Bhd principally involved in the business segment such as hand protection, sexual wellness, dental care and others.

TOPGLOV provides a comprehensive range of products such as latex examination gloves, nitrile examination gloves, surgical gloves, polychloroprene examination gloves, cast polyethene (CPE) gloves, thermoplastic elastomer (TPE) gloves, vinyl gloves, cleanroom gloves, household gloves, industrial gloves as well as non-gloves products such as dental dam, exercise band and condom.

Most of the glove products cater to the medical profession, surgeon, cleanrooms and industrial usage as well as aerospace, household, food and beauty industries.


Financial Review

Based on the past 5 financial years of revenue chart above, the group’s revenue grew years-on-years (y-o-y) from FY2015 (+10.33%), FY2016 (+15.06%), FY2017 (+18.03%), FY2018 (+23.81%) to FY2019 (+13.75%). On a CAGR basis, TOPGLOV has grown 16.11% based on 5 years. The increase in revenue was mainly due to robust growth in sales volume of nitrile gloves segments which saw a 30% surge, enhanced the marketing efforts as well as additional nitrile capacity which has increased by 54% over the past 2 years, with the plan for further expansion. (Source: Annual Report 2019).


Top Glove Corporation Bhd has successfully recorded a considerable RM41,627 million increase in gross profit, translating to a growth of 4.94% from RM842.4 million in FY2018 to RM884 million in FY2019. Based on 5 years CAGR basis, the group has grown 18.18%. The increase in gross profit was mainly attributed to 46% jump in volume sold for surgical glove segment which largely due to the contribution from Aspion and increases in demand for nitrile glove segment, which sales volume go up by 20.3% and 24% respectively chiefly by US and Japan. (Source: Annual Report 2019)


The Net Profit After Tax (PAT) of TOPGLOV has decreased 15.16% from RM433.2 million in FY2018 to RM367.5 million in FY2019. The decreased in Net Profit After Tax (PAT) was mainly due to the increase in latex concentrate prices, competitive environment for natural gloves as well as the losses occurred in the vinyl segment due to oversupply in China.


Cash Flow Statements

The net cash from operating activities has obtained a positive cash flow of RM526.2 million in FY2019 compared to RM341.2 million in FY2018 indicates that the company is healthy and have enough cash used for business expansion.

The net cash from investing activities in FY2019 is (-RM493.5 million) was mainly due to purchase of property, plant and equipment (RM568.1 million), purchase of land use rights (RM55.6 million), purchase of intangible assets (RM0.016 million), additions to investment property (RM0.393 million), purchase of investment securities (RM138.4 million), an increase in the bank balance pledged with banks (RM1.1 million). The negative cash flow indicates that the company is investing in its business to grow.

The net cash from financing activities in FY2019 is (-RM34.6 million) was mainly due to the transaction cost incurred (RM0.086 million), dividends paid on ordinary shares (RM217.4 million), dividends paid on non-controlling interest (RM2.7 million), repayment of loans and borrowings (RM1.2 billion).

Based on liquidity ratio calculation, TOPGLOV has a current ratio of 0.967 times in FY2019 indicates that the company may face some liquidity issue if any unforeseeable circumstances forcing the company to settle the current liabilities by using the current assets such as inventories, other current assets, tax recoverable, investment securities, derivatives financial instruments, trade & other receivables, cash and bank balances amounting to RM1.5 billion.


Prospect and Challenges

The domestic rubber sectors are expected to be a bounce-back in FY2020, as the US buyers will be likely to increase the Malaysian shipments as well as 15% additional tariff imposed on medical gloves made in China, effective from 1 Sep 2019. (Source: The Malaysian Reserve, 17Dec2019). The expected robust growth is underpinned by an expanding of the global healthcare sector as well as increased awareness of the importance of hygienic practices throughout the industry, especially the emerging markets such as India and China. (Source: TheEdge, 12Dec2019).

TOPGLOV will be in expansion mode as there is an influx of latex glove supply from Thailand-based Sri Trang Agro-Industry Pcl aims to increase the rubber glove output by about 74% to 30 billion gloves annually by the end of FY2020 from 22 billion in the nine months of FY2019. (Source: TheEdge, 12Dec2019).  TopGlove also has date established a total of 4 R&D Centres staffed by some 454 researchers (as at FY19) from across varied fields of expertise, working together to drive innovation and breakthrough at Top Glove. (Source: Annual Report 2019).

TOPGLOV has set aside about RM100 million for land acquisition in the country would be used for setting up the factories to produce vinyl gloves. TOPGLOV also will open its first Vietnam factory to meet a surge in demand for the hygienic gloves. As the construction of the plant has started in Vietnam, it is done deal there and the operation would commence in the first quarter of 2020. (Source: Daily Express, 21Mar2019).

In the year-end of FY2019, TOPGLOV has carried out large scale line modification, key process improvements as well as intensive training for factory floor personnel. They are also pleased to report that there is no impairment loss required for the provisional goodwill arising from the acquisition of Aspion as at 31Aug2019. (Source: Annual Report FY2019).

TOPGLOV is also developing the eco-friendly gloves, the first if which was their flagship green product, BiogreenTM Biodegradable Nitrile Gloves (Powder Free), launched in June 2019. They also continue to enhance their product portfolio with more specialised and cost-effective surgical gloves, while diversifying into non-glove products such as tourniquets. (Source: Annual Report FY2019).


Rating System

Return on Equity (ROE) = Average

Revenue [5 years CAGR] = Good

Net Earnings [5 years CAGR] = Average

Basic Earnings per Share [5 years CAGR] = Average

Interest Coverage = Average


My Insight

Based on my calculation on Discounted Earnings Model, TOPGLOV has a fair value of RM8.40. The current market value of TOPGLOV is RM4.77 which is undervalued (Based on 23Dec2019). TOPGLOV has a beta of 1.020 (500 days) indicates that the company is more volatile than the current market, which means the investors/traders are actively trading in this stock, they may face a higher risk. Based on my computation of Compound Annual Growth Rate (CAGR), TOPGLOV has an expected market return of 6.27%.

In conclusion, Top Glove Corporation Bhd has achieved an outstanding performance for revenue in FY2019 due to the robust growth in sales volume of nitrile gloves segments and capacity of nitrile segment expansion. Even though the Profit After Tax has slightly decreased in FY2019, I still believe that the company is well-positioned to tap on the growing glove demand and prioritise R&D, innovation and Industry 4.0 initiatives.


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Written by Stella Goh – Market Data Analyst | 25 December 2019

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