-->

Type something and hit enter

On






In 2019, EPF declared 5.45% Dividend yield for Conventional Deposits and 5% for Shariah Compliant Deposits. The Divided Yield is highly anticipated every year by savers especially retirees who would rely on yearly withdrawal to sustain their livelihood. If the EPF yield declared for that year is bad, there will be huge public backlash. Hence, Government of the day will do whatever they can to ensure dividend payout is good or at least above expectations.

Source : RinggitPlus

In fact, if we compare the pension fund returns for EPF to others around the world, our EPF has one of the best performance in the world. Now, when it comes to EPF savings, savers are very particular about dividend yield given. What I find strange is that majority of investors in the stock market, especially during bull runs is no bothered about Dividend yields. Naturally, these investors believes that the stock they are investing should give better returns in terms of capital gain compared to the miniscule dividend yield. 

Following the vaccine news announcement by Pfizer & Moderna, the vaccine positivity has led funds to rotate away from  high growth stocks to value stocks. A good example in Malaysia would be the shifting of funds from Tech & Glove stocks to Banking and some recovery themed stocks. This has resulted panic selling across growth stocks and panic buying in value stocks. This chart below as a comparison is very telling :








Now the question is whether such movement in the stock market is warranted? I think there are two points to this question.

One, there is a difference between value stocks and recovery stocks. Value stocks are company with strong balance sheet and fundamentals which business were somewhat impacted by the pandemic / MCO. The value stock has enough assets, cash to navigate through the pandemic without the risk of default. These stocks are like the banks, telecommunication, utilities  and insurers.

Two, recovery stocks are referring to companies which are mostly badly affected by the pandemic such as tourism, hospitality, airlines, retail, travel etc. These companies are not equivalent to value stocks because these companies may not have strong fundamentals to begin with. In effect, it means there is default risk to these companies. So I do agree in buying value stocks and always keeping them in your portfolio but I do not agree that one should look at recovery stocks any time in the near future. 

The reason is because even if vaccines are rolled out, it will be done gradually and the lasting impact of Covid-19 is not eradicated overnight. These recovery stocks will take a long time to return to pre-Covid 19 level earnings. Currently, the market investors or speculators are just riding on the optimism of reopening of economy and resolution of the pandemic ahead of time. This brings me to why Glove stocks are still necessary to be kept in your portfolio even after vaccine announcement.






For the longest time, Glove stocks were given many different categorisation by financial analysts. Some called Glove stocks as cyclical, some say defensive, some say growth but which category does Glove stocks truly belong to? 

It is cyclical in nature due to the events of the world (HIV, SARS, H1NI, EBOLA, Covid-19) and fluctuating raw materials cost (Latex Gloves depends on Natural rubber, Nitrile Gloves depends on Nitrile Butadiene Rubber which is linked to oil). Why then some call Glove stocks defensive? The key reason in my view is because of its designation as part of healthcare sector and it is apolitical with continuous demand over the years. 

In my humble view, Glove stocks are quintessentially growth stocks. There is no denying their growth stock nature just by looking at their earnings and share price chart over the past 10 years. But, due to the supernormal profits in FY 2020, 2021 and potentially 2022, Glove stocks are moving from Growth to Yield.






One of the key determinant of whether a share price moves up organically is earnings. Excluding M&A and corporate exercise, the direct correlation between share price uptrend is earnings growth. With earnings growth, the increased in profits / excess cash will be used to lower debts, pay dividends, investments, capital expansion or cash reserves. This is why I say Gloves are moving from Growth to Yield stock especially so within the next 1 year window. Just look at Top Glove as an example, it has in place a 50% Dividend Policy. Which in effect means, 50% of the profits would be used for dividends to reward shareholders every financial year. So let's do a simple back of the envelope calculation to understand the potential dividend that Top Glove will declare in FY 2021. 



Top Glove : 

FY 2020 Profit after Tax = RM 1,867 Billion              50% Dividend Policy = RM 934 Million 

FY 2021 Profit after Tax = RM 10,378 Billion            50% Dividend Policy = RM 5.19 Billion

FY 2022 Profit after Tax = RM 5,295 Billion              50% Dividend Policy = RM 2.65 Billion


The current share price is RM 7.30 as at 20th November :
 
The Dividend per share for FY2020 is 11.8 sens which translates to Dividend Yield of 1.6% 

The Dividend per share for FY2021 is 63.5 sens which translates to Dividend Yield of 8.7% 

The Dividend per share for FY2022 is 32.4 sens which translates to Dividend Yield of 4.4% 

Do you think the current share price of Top Glove is cheap or expensive based on looking at its earnings and yield? Objectively, it is undervalued even looking at FY 2022 where the analyst projects a fall in earnings due to the end of Covid-19 pandemic. Taking a normalise averaged out Dividend Yield across 3 years, Top Glove shareholders at current share price would enjoy 4.9% per annum.





Now, lets turn to Hartalega. It has 60% Dividend Policy where 60% of the net profits every financial year are distributed to reward shareholders. So let's do a simple back of the envelope calculation to understand the potential dividend that Hartalega will declare in FY 2021. 

Hartalega: 

FY 2020 Profit after Tax = RM 435 Million              60% Dividend Policy = RM 261 Million 

FY 2021 Profit after Tax = RM 2.88 Billion               60% Dividend Policy = RM 1.73 Billion

FY 2022 Profit after Tax = RM 5.07 Billion               60% Dividend Policy = RM 3.04 Billion


The current share price is RM 14.40 as at 20th November :
 
The Dividend per share for FY2020 is 7.75 sens which translates to Dividend Yield of 0.55% 

The Dividend per share for FY2021 is 50.5 sens which translates to Dividend Yield of 3.5% 

The Dividend per share for FY2022 is  88.7 sens which translates to Dividend Yield of 6.16% 

Similarly, do you think the current share price of Hartalega is cheap or expensive based on looking at its earnings and yield? Objectively, it is undervalued especially looking at FY 2022 where the analyst projects a continuous growth in earnings despite the end of Covid-19 pandemic. Taking a normalise averaged out Dividend Yield across 3 years, Hartalega  shareholders at current share price would enjoy 3.4% per annum.




You can see that company earnings, growth and yield are all correlated. The most important point to takeaway is this - the company's share price should be determined by its ability to deliver earnings first, grow earnings second and sustain earnings third. This will naturally form the transition phase of a company from growth to value to yield stock. 

With that in mind, do you think that the Glove stocks, both Hartalega (RM14.40) and Top Glove (RM7.30) specifically, would be trading at current price or even lower when the coming years they would be having a Dividend yield of 3.5% & 8.7% in FY 2021, 6.16% & 4.4% in FY 2022? Definitely no as investors and funds who chase for yields will move the share price up. The worst case scenario - you still get to collect dividend at a higher rate than FD.




I understand everyone have their own view and opinion on the glove sector because it is an industry that is relatable, understandable and Malaysia is the world leader. The scrutiny adopted towards the sector is of higher standard compared to other sectors because of the access to information and knowledge. Whether one uses DCF, PER, Dividend Yield or EV/EBTIDA to value glove companies, at the end of the day, valuation is an art, not science. There are many factors to consider and it is hard to say one's valuation method is better than the other.

This was an article I wanted to write a long time ago during the September Glove selloff. I held back from publishing because I was anticipating Glove earnings season would clash with a vaccine newsflow month which may lead to a potential selloff. I was hoping that readers and investors who are rational would be able to see the record earnings and not succumb to headlines news and fear to panic sell. Sadly, many neglected to view the facts & data objectively. Even some (not all) professional analyst were similarly panicking where their judgment was impaired by mainstream view and "herd mentality".


The recent good news shows that what EPF is doing is in line with the key message in my article. EPF was the big buyer on 17th November 2020 (Tuesday) when gloves were still being sold off after Pfizer and Moderna announcement. EPF did not buy small as they bought close to 174 million shares more than RM 2 billion worth bringing them above the 5% substantial shareholding level. Hartelega being my Long Term Value Pick means there is little you need to worry about and EPF being a long term shareholder buying into Hartalega is a strong validation of this investment thesis. It is also a confidence booster to the sector.


My simple conclusion remains :

1. Severe shortage of gloves in the market, 
2. Earnings visibility for at least 1 year minimum for the sector, 
3. The companies will be delivering continuous record earnings in coming quarters 
4. Transition from Growth to Yield or Growth + Yield stock,
5. With the recent selloff, Glove stocks have become very attractive valuation wise. 

If you are wondering whether you should still hold glove stocks in your portfolio, that is a decision you must make on your own. However, the history of the financial markets has taught me that yield is very important to investors and funds, hence it will ultimately form the bottom to protect glove stocks from falling further. When the downside is protected, the upside takes care of itself.

_______________________________________________________________

Telegram channel : https://telegram.me/tradeview101


Website / Blog : https://www.tradeview.my/


Facebook : https://www.facebook.com/tradeview101/or 


Email me to sign up as private exclusive subscriber : tradeview101@gmail.com


Food for thought:


 
https://klse.i3investor.com/blogs/tradeview/2020-11-21-story-h1536549494-_Tradeview_2020_Yield_Will_Protect_Gloves_Share_Price_From_Falling_Furt.jsp

Click to comment
Back to Top
Back to Top