Before Covid-19, almost all major glove companies in Bursa are in net debt position. This is mainly due to they continue to expand using the internal generated cash and bank borrowings and also paying dividend. The expansion is important for glove companies due to they can increase their economy of scale, market shares and competitiveness.
The world biggest glove producer is Topglove (26% market share) where it has make huge profit and cash flow from operation in past 6 months. With their cash, technical know-how and big order received lead to on-going aggressive expansion in coming 2 years. The competitiveness of Topglove in 2022 will be higher with their expanded capacity, customer base, brand and huge cash pile earned from 2020 to 2022.
Glove is a commodity product. Top 4 glove companies with their capacity can react to market needs, has established market reputation, connection with distributors, able to control glove market price to some degree to their advantage. Topglove in this case may have the biggest advantage due to its biggest capacity, diversified customers base, reputation and huge cash pile which new glove players hardly to compete with them.
Table below shows the 3 year ex-cash PE valuation for Topglove:
Note: Ex-cash PE means PE without including cash, FY2021E (E = Estimate)
I like Topglove due to it has been effectively using its cash generated from operation to continuously
expand to increase market share, at the same time rewards its shareholders with dividend (may has
special dividend in FY2021 due to super normal earning)
What is the fair PE for the world largest glove producer, strong growth in coming 12-18 months, net cash, strong operation cash flow with 50% dividend payout policy?
Personally, my fair valuation for Topglove in FY2021 is about 8x-9x (EPS 128c, TP of RM10.2 to RM11.55), FY2022-23 is about 16x-22x for the following reasons:
- World no 1 glove producer for Nitrile, Latex, and Vinyl gloves in term of production and highest revenue and profit in Bursa glove companies.
- Aggressive expansion with over 20% in 2020, over 15% in 2021
- Owning latex concentrate (raw material) factories in Thailand and currently building a Nitrile-butadiene concentrate (nitrile glove raw material) factory in Malaysia (land clearing work in-progress with plan to complete in 2 years time)
- High earning quality with strong operation cash flow generated from high net profit in FY2020, FY2021 and FY2022 (possible to generate 18B to 20B cash flow from operation, 2020-2022).
- High dividend payout policy of 50% which may translate to about 60-63c for FY2021 (assume EPS 128c) with possibility of special dividend. This is relatively high dividend yield of 7.16% assuming 63c dividend at current share price of 8.8, which maybe this is the reason attract big institutional fund like EPF keep buying Topglove recently to become substantial shareholder.
The cash generated from operation in FY2020-21 alone (13B) is enough to buy out the whole GENM (net debt of 5.3B as total Genm debt is 9.3B), or Inari+MPI+Uchitec (still got balance).
Of course, with the huge cash pile Topglove will become stronger in future with expansion, acquisition and reward shareholder with dividend and their on-going global Fortune 500 plan.
There are only two world no 1 manufacturer sin Malaysia, one is Topglove, another one is condom producer.
If you holding Topglove for the past 5-10 years (even you sell before Covid), you will laugh all the way to bank but if you own condom producer for past 5 years, then you may cry all the way at home.
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