Topglov- hard slogging ahead

Result Update

Topglov reported its results for QE30/11/2012 last week. Its net profit increased 83% y-o-y but dropped 9% q-o-q to RM57.5 million while revenue increased 5% y-o-y but dropped 4% q-o-q to RM584 million. Topglov's topline dropped q-o-q due to lower selling price. This is in line with the 14%-drop in latex price. This plus greater efficiency resulted in an increase in net profit margin.

Pre-tax profit margin inched up from 11% in QE31/8/2012 to 12% in QE30/11/2012, despite the 14%-drop in latex price and greater efficiency. This is a sign that the fierce competition in this sector has caused the players to pass on the entire benefit of lower raw material price to the customers. The adjustment in the selling price more than offset the increased sales volume and this led to a decline in revenue.

The question to consider: How would the rubber glove producers perform if the raw material price start to rise? From Chart 1 below, we can see that rubber prices had broken its downtrend and could be poised for a rebound.

 
Table: Topglov's last 8 quarterly results


Chart 1: Rubber price chart as at Dec 18, 2012 (Source: Rubbernet)


Chart 2: Topglov's last 26 quarterly results

Valuation

Topglov (closed at RM5.73 today) is now trading at a PE of 15.5 times (based on last 4 quarters' EPS of 36.9 sen). At this PE, topglov is deemed fairly valued.

Technical Outlook

Despite breaking above the strong horizontal resistance at RM5.55, Topglov does not seem to rally. To me, this simply means that there is a big seller who is prepared to sell at this price. This is a battle between the bulls (buyers) who are attracted to Topglov for technical reason as well as to get the upcoming dividend of 9 sen. The bears (sellers) may be acting on their concern about the future prospect of the company. The outcome of this ongoing battle will be decided soon.


Chart 3: Topglov's weekly chart as at Dec 19 2012 (Source: Quickcharts)

Conclusion

Topglov will surely exercise the mind of many investors. Its financial performance has improved marginally but further improvement will be hard to come by. While the technical outlook is positive, this too may not be sustained. as such, investors will have to make their own judgment call. For now, I rate the stock a HOLD.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Topglov.