Asked by Anonymous
Asked on 18 Mar 2019
Their revenue growth seems to be too attractive to ignore...
Summoned by my friend Isaac who knows I love to talk about this company.
Firstly I must admit I am somewhat lukewarm about TopGlove. While their growth is indeed impressive, it is important to note they were mostly inorganic from big M&A deals as pointed out by Enk Loui previously. This reminds me slightly of GE's case whereby they sought growth purely through M&As and did not properly integrate and consolidate these companies in. While TopGlove is not divesting into non-specialised sectors as much as what GE did, it is still worthy to note PATMI's are not growing near the rate of top line revenue growth. Other than managing interest expenses from debt leveraging, this means Mgt should increasingly focus on cost cutting measures to improve operating and EBITDA Margin(which is something to look out for in coming quarters)
Secondly, while TopGlove dominates the main marketshare of glove suppliers within Malaysia with an impressive track record of growth, it is important to note its competitors were doing equally well during this period. Going back to the first point, investors cannot expect M&A growth to be consistent with its previous year's growth rates given the industry is now closely rivalled, mainly by major players Hartalega and Supermax which are both malaysian based as well. I believe the current pricing is reflective of overly optimistic expectations given its track record of growth in past 5 years.
Moreover overseas operations still represents a small fraction of TopGlove's earnings. While the rubber glove industry might be quite a defensive one, I believe growth within Malaysia markets is already at its saturation point. To grow further, TopGlove must make greater breakthroughs overseas- something it has not been able to prove yet although there are manufacturing plants overseas.
Yeap been looking at it a while back!
Some quick facts:
They are one of the largest manufacturers of gloves, with operations spanning across Malaysia, Thailand, China, US and Europe. If i recall correct they currently take up ~26-28% of the overall market share. The 3 other main competitors in the industry are: Kossan, Supermax, Hartalega.
While the STI declined in 2018, Top Glove’s shares have posted an impressive 40% gain. Market participants have been won over by Top Glove’s record-breaking sales revenue and all-time high profit before tax for the full year ended 31 August 2018 (FY2018). It also managed to increase its sales volume by a solid 26% compared to last year.
Revenue has also recorded an impressive growth. Revenues (in '000 MYR) for FY2018, 2017 & 2016 was 4,214,482, 3,409,176 and 2,888,515. This translates to a YoY growth of 23.6% in FY2018 and 18.0% in FY2017 respectively, a compounded annual growth rate (CAGR) of 20.8% in the last 2 years.
To furtheer achieve sustainable revenue growth in the future, it has adopted both organic and inorganic growth strategies:
For example, it completed the acquistion of Aspion Sdn Bhd, one of the largest surgical glove producers globally as well as Duramedical Sdn Bhd, a company manufacturing and marketing dental hygiene products such as dental dams in order to diversify its production into medical products.
To achieve organic growth, it has also constructed Factory 31 and Factory 32 (operational in Early 2019). Once completed, it is estimated that this will increase Top Glove’s total number of production lines by 74 and production capacity by 7.4 billion gloves per year.
Attached is the Ultimate Scorecard of Top Glove. Ultimate Scorecard is found on my Fundamental Scorecard website.
A look at the company shows that its FCF for the last 5 years has been negative. Furthermore, it is highly leverage and low current ratio with a high PB.
Thus, depsite the increase in revenue, it is hardly undervalued. This is what people determine as a growth stock with a PE of 25x!
It is important to look at the overall package of the company before determining it is a good company to invest in.
If you invest for the short term, then it is really up to you. If not, I believe there are better opportunities around.