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.
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.
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.
_______________________________________________________________
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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
