TOPGLOV: Fantastic Earnings For Now? (UPDATED)

Result Update

For QE28/2/2021, Topglov's net profit rose 20.8% q-o-q or 24-fold y-o-y to RM2.869 billion while revenue rose 12.7% q-o-q or 336% y-o-y to RM5.365 billion. The Group’s strong and healthy Sales figures were attributed to the continued demand for gloves globally while the improved Profit came on the back of higher sales output, high utilisation levels which amplified production efficiency, coupled with higher average selling prices (ASPs) in line with market pricing. The Group’s healthy profit was also attributed to ongoing enhancements across its operations, through digital transformation, continuous R&D and innovation, quality and productivity initiatives and talent acquisition and development.

 
Table 1: Topglov's last 8 quarterly results

Graph: Topglov's last 74 quarterly results

Financial Position

As at 28/2/2021, Topglov's financial position is deemed healthy with current ratio at 1.9 times and Total liabilities to Total equity at 0.51 time.

Valuation

Topglov (closed at RM5.19 yesterday) is now trading at a trailing PE of 6 times (based on last 4 quarters' EPS of 85.89 sen). This exceptionally low PE ratio reflects investors' perception that Topglov's future earnings must decline in the near term due to average selling prices & profit margins normalization. This is not unreasonable given the glove demand has been driven by the Covid-19 pandemic, which is expected to be brought under control with the arrival of vaccines worldwide.

My previous 2 earnings reports on Topglov prior to the pandemic were in June 2019 (here) and October 2018 (here). In these reports, Topglov was trading at a PE of 31-32 times. Assuming that Topglov's fair PE is 32 times, the only way that Topglov's current share price can be justified is for its quarterly earnings to drop by a whopping 81% from RM2.869 billion to RM545 million! Is that too extreme?! 

To get a better feel of how much Topglov's net profit has risen, let's compare the financial performance in the last 4 quarters against the performance in the preceding 4 quarters. Ssee Table 2 below. 

Table 2: Topglov's latest 4 quarterly results compared to the previous 4 quarterly results

The first thing that would jump up is the staggering 18-fold increase in net profit from RM382 million to RM6.885 billion! This was achieved on the back of a 210%-increase in revenue from RM4.819 billion to RM14.922 billion. From the foregoing, I would highlight 2 points:

(a) Topglov's net profit margin has shot up from a mere 7.9% to 46.1%.  

(b) As a result, quarterly net profit rose from an average of RM95 million to RM1.721 billion. 

With the pandemic being brought under control, it is likely that the abnormally high net profit margin will decline over the next few quarters. I have computed 4 scenarios of lower net profit margin. See Table 3 below.

Table 3: Topglov's 4 possible scenarios of net profit margin & valuation estimate

If we accept that Topglov would eventually trade at its past PE of 31-32 times, then the market is now projecting its 4-quarter net profit would go down to RM1.344 billion in next few quarters. That means its quarterly net profit would be about RM336 million. 

Nothing is a sure thing in investing. If the above computation and assumptions are too pessimistic and proven wrong later, then the market will revise its outlook and the share price will go up, or vice versa. For now, this is what's the market is telling us.

Technical Outlook

Topglov has peaked at RM9.76 in early August, and then went into a gradual decline. If you plot a semi-log chart, it is possible to draw an uptrend line, SS with support at RM4.60.

Chart 1: Topglov's semi-log daily chart as at Mar 9, 2021 (Source: Malaysiastock.biz)

Conclusion

Based on the current strong financial performance, healthy financial position and fairly attractive valuation, Topglov makes a very appealing case as a value stock for long-term investment. However the arrival of vaccines and their positive impact in controlling the spread of the pandemic have changed the narrative of investing in pandemic stocks. Is Topglov a value stock or a value trap? Only time will tell. 

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.