Topglov: Revenue & Profits Have Landed

Result Update

For QE30/11/2021 (1QFY2022), Topglov's net profit dropped 69% q-o-q or 92% y-o-y to RM186 million while revenue dropped 25% q-o-q or 67% y-o-y to RM1.584 billion. The Group’s weaker quarter-on-quarter performance for 1QFY2022 was mainly attributed to declining average selling prices ('ASPs') and higher operating costs as a result of lower utilisation rates, while raw material costs reduced at a much slower pace in comparison to glove ASPs, thereby impacting profit. Raw material prices for the quarter ended 1QFY2022 have reduced from 4QFY2021, with average natural latex concentrate prices reducing by 8% from RM5.54/kg to RM5.09/kg, whilst nitrile latex price fell 19% from USD2.21/kg to USD1.79/kg.

Table: Topglov's last 8 quarterly results

Looking at the quarterly result graph below, we can see that revenue, profits and even profit margins are now lower than QE31/5/2020. Not surprisingly, dividend is lower than that paid out in QE31/5/2020.

Graph: Topglov's last 77 quarterly results

The perennial qustion - are we there yet? - has to be asked. To be frank, I don't think anyone has a quick answer. The mismatched between increased supply and reduced demand could lead to a period of lower ASPs. If that's a serious problem, imagine what would happen if a price war broke out. You may ask why would anyone engage in a price war at a time like this. The need to increase sales to match the increased capacity, would drive the players to engage in a price war! 

The price war would lead to lower revenue & lower contribution. With lower contribution, you would not be able to cover the increased overhead expenses from the increased capacity. You may note that Topglov's Property, Plant & Equipment has risen by 42% from RM2.874 billion as at May 2020 to RM4.090 billion as at November 2021. 

Based on the above, I think the prospect of further decline in profit cannot be ruled out.

Financial Position

As at 30/11/2021, Topglov's financial position is deemed healthy with current ratio at 2.0 times and Total liabilities to Total equity at 0.30 time.

Valuation

Topglov (closed at RM2.18 as at 4.05 pm) is now trading at a PE of 23 times (based on annualized EPS of 9.28 sen). That's a fair valuation if we assumed that Topglov's profit remains steady at current level. As discussed above, the prospect of lower profits or even losses, could not be discounted.

Its planned listing on the HKEX may give an indication of the management's "outlook" for the share price (here). The amount it plans to raise from its proposed Hong Kong listing is about RM2.21 billion. The number of shares it will issue for the Hong Kong listing remains at 793.5 million shares. That means the IPO price will be about RM2.785 per share. However, things are moving so fast that the expected share price may not be achieved. Nevertheless, this is an indication of the internal thinking of its management.

Technical Outlook

Topglov's downtrend after peaking in October 2020, is still intact. The immediate support is the psychological level of RM2.00.

Chart: Topglov's daily chart as at Dec 10, 2021 (Source: isaham.my)

Conclusion

Based on the current poor financial performance and industrial outlook, Topglov is a stock to be avoided.

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.