Topglove has just announced its results for 1H2010 ended 28/2/2010. Its net profit increased by 8.2% q-o-q or 95.9% y-o-y to RM70.5 million. Turnover increased by 8.0% y-o-y or 47.2% q-o-q to RM510 million. Despite the rapid expansion by all players in this industry, it is good to note that Topglove has been able to maintain its pre-tax profit margin at 18.4% for the past three quarters. This is a sign that increased supply was met by increasing demand for rubber glove.
Table: Topglove's last 8 quarterly results
Chart 1: Topglove's last 15 quarterly results
Valuation
Topglove (closed at RM12.56 yesterday) is now trading at a PER of 16 times (based on last 4 quarters of 79 sen). With top-line growth of 19% in the last 3 year (actually, 23% for the past 4 quarters & 15% for the preceding 4 quarters), Topglove's Price/Earnings To Growth ('PEG') ratio is about 0.77 time. A PEG ratio of less than 1 means that the stock is attractive. However, this may not be the case if profit margin were to ease off.
PEG ratio = PE / (Growth Estimate + Dividend Yield)
= 16 / (19 + 1.8)
= 0.77 times
Note: I have substituted Revenue growth for Earning growth as the latter has shot up sharply last 3 quarters (due to higher profit margin).
Negative scenario examined
Assuming that Topglove's pre-tax profit margin dropped back from 18.4% to 12% (the average pre-tax profit margin for QE28/2/2009 & QE30/11/2008). The pre-tax profit for the last 4 quarter of RM314 million would be reduced to RM205 million. Assuming the same effective tax rate of 26%, Topglove's net profit would drop from RM235 million to RM152 million and EPS would ease off from 79 sen to 51 sen. Its PER would be about 25 times and PEG ratio would be about 1.2 times. From this, we can see that profit margin is critical to maintaining super profit for this industry. As the players keep on increasing their production capacity, the industry will slowly reach a saturation point. We must be aware of this possibility even as we cheer the players for their out-performance today.
Technical Outlook
From the two charts below, there is no sign of any weakness in Topglove. From Chart 2, we can see that Topglove would surge higher at every upside breakout of a resistance (I have counted 4). In the past 14 months, the 20-day SMA line has offered good support for the stock. There was only a period when the share price went below the 20-day SMA line & tested the 50-day SMA line (in August & September last year). We may use the 50-day SMA line as a warning sign for a possible reversal for Topglove. From Chart 3, we can see that the last bull rally for Topglove ended with a break below the 10-month SMA line. To use this trigger for a selling signal may not be a good idea as it is too slow, resulting in giving back too much profit (or taking on too much losses) before exiting the stock.
Chart 2: Topglove's daily chart as at Mar 17, 2010 (Source: Tradesignum)
Chart 3: Topglove's monthly chart as at Mar 1, 2010 (Source: Tradesignum)
Conclusion
Based on good financial performance, reasonable valuation & positive technical outlook, Topglove is still a HOLD. However, we need to track Topglove's financial results closely for a reversal in the super normal profit enjoyed by the company.
18 comments:
Hi Alex,
When the share will big drop ? please advice.
Hi Alex,
Waseong since today 2.50 ,shall this share can move forward?
Hi Phkoay,
One can spot a breakout but whether the share will go according to our prediction is another matter. Sometime, the rally comes immediately. Sometime, it comes after a lapse of many days. Sometime, it turned out to be a bull trap. Such is life...
Hi Alex,
How about Leader (4529) ? can it but for short-term ? how much can it go ?
Hi Alex,
Do you think this will impact other glove stocks?
As for Muhibah, what is your view?
Good day Alex. Do u follow the stock KSL? Templeton fund has just bought 5% stake. Chart wise is uptrend. Fundamentally it made RM85m for FY2009 or 24c/share. Any thoughts for this counter? Cheers.
Hello Alex, Have you research Supermx and Latexx before? I am interested in both since it is much cheaper with Topglove. Thanks - I like this article as it is all-rounded commentary.
Hi Alex
Can you comment about TA enterprise, E&O, OSKVI and Dialog. thanks
Hi John,
KSL is a profitable Johor-based property developer. For FYE31/12/2009, its net profit declined 5.7% to RM85.3 million on the back of a 14.4%-drop in sale to RM185 million. EPS for FY2009 was 24.3 sen. This means the stock is trading at a PER of 6 times only. Based on this, we can expect further upside on this stock, possibly trading up to a PER of 8-10 times.
KSL's immediate resistance is at RM1.45 & thereafter at RM1.60.
Hi guys,
There have been too many requests lately. I cannot attend to all these requests. To look at a single stock could easily take 10-20 minutes and I do not have the time.
Hi Alex,
Happy to read your articles and comments.
I can see many readers (followers) ask individual stocks and expecting some feedback and reply from you on that particular stock.
I did ask you too. (hahahaha....)
Do you have your own list of stocks to follow which you can share with us ? Just ask only ah..don't get angry ah.....
We readers do understand your list of stocks does not constitutes a direct invitation for us (readers) to buy . Readers are mature nowadays and need to be responsible for his or her own decisions.
If there is such an updated list from time to time , will make us (newcomers) can focus on more specific stocks more easily , rather than going thro the whole KLSE.
Thanks for sharing .
Hi cheer,
Topglove's results should have a positive impact other glove stocks. It reaffirms the perception that this sector is still doing fine.
As for Muhibah, it is holding onto the horizontal support of RM0.92. Its overhead resistance is at the psychological RM1.00 level & the downtrend line resistance at RM1.05.
Hi hwh1,
I did a comprehensive post on Supermx sometime back and I still continued to cover it from the technical angle from time to time. It has just proposed a 1-for-4 bonus issue which may generate further buying interest form retailers. The stock may rise further if it can break above its immediate resistance at RM6.40.
I have not covered Latexx, but this stock should have good support from the 50-day SMA line at RM3.70-72.
I must admit that I am a bit weary of rubber glove stocks after the strong rally in the past 1 year. If you do not have any position in this sector, you may accumulate some but you must be realistic in your expectation. From hereon, the upside reward is nearly equally to the downside risk.
Hi teh,
My technical take on these stocks are:
1) TA is resting on its strong horizontal support of RM0.66-67.
2) E&O's immediate horizontal support is at RM0.90. A break below this support could send the stock to RM0.86-87.
3) OSKVI's immediate support is at RM0.55 and thereafter at RM0.45.
4) Dialog has a good support from its medium0term uptrend line at RM1.00. An upside breakout above the ascending triangle at RM1.07 could signal the continuation of its uptrend.
On OSKVI, you may note that it reported a pre-tax loss of RM102 million for QE31/12/2009 due to share of losses in associated companies & impairment of investment in associated companies & other investments. For FYE31/12/2009. OSKVI incurred a pre-tax loss of RM112 million. despite the huge losses, its NTA per share remain fairly healthy at RM1.32.
Thanks Alex - appreciated for your advice.
Hi Alex,
Most analysts seem to be vy bullish on rubber glove sector, with a 40~60% price upside. Would appreciate yr views on
1. Which counter(s) do u see as still undervalue compare to it's peer? and which is already 'expansive'?
2. At what point/target price would u consider cashing out of this sector completely?
I'm still holding on to some Advante, Kossan & Supermax.
Thanks for yr advise.
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