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Singapore Investment


 TOPGLOV 7113 TOP GLOVE CORPORATION BHD, at 10-year low of 83 sen, steeply undervalued but fundamentals still strong

ON May 20, 2022, the Employees' Provident Fund (EPF) reduced its equity holding in Top Glove Corp Bhd to below 5.0 per cent, a move seen by analysts as one of the factors in the rubber glove maker's shares falling to 83 sen last Friday.

In fact, in the absence of the EPF as a main institutional investor, Top Glove's shares have apparently been in the "undervalued'' category.

Some analysts agree that Top Glove's stock position does not receive a proper rating, let alone a fair price.

MIDF Research recently stated that the global economic transition to an endemic level had caused Top Glove to undergo a period of transition due to a supply-demand imbalance.

Given the current glove demand and supply imbalance, MIDF Research said Top Glove had postponed some of its expansion plans.

This will lead to a normalisation of Top Glove's profit margins in the near term after reaching historic highs in its financial year 2022 (FY22).

MIDF Research maintains Top Glove's earnings forecasts for FY22, FY23 and FY24 and expects the earnings outlook to remain subdued due to a lack of immediate catalysts.

It also maintains a "Neutral" call on Top Glove with an unchanged target price of RM1.75.

"Our valuation pegs Top Glove at 14.5 times FY23F earnings, in line with its two-year historical average. Meanwhile, the dividend yield is good at 3.5 per cent for FY22F," MIDF Research said.

Stock research portal GuruFocus thinks Top Glove's shares appear to be very undervalued.

GuruFocus researches the fair value at which the stock should trade. It is calculated based on the historical multiple that the stock has traded at, past business growth and analysts' estimates of future business performance.

At its current price of 83 sen and market capitalisation of RM6.81 billion, Top Glove shares are believed to be significantly undervalued. Hence, the stock's long-term return is likely to be much higher than its business growth, which averaged 25.9 per cent over the past five years.

Last Friday, Top Glove closed at 83 sen, a 10-year low and down one sen from the day earlier, with 41.48 million shares traded.

Compared to pre-Covid-19 on Dec 30 2019, the share price stood at RM4.75.

However on Sept 3, 2020, Top Glove got an ex-bonus based on two bonus shares for one existing common share.

So, after making adjustments for bonus shares, the share price on Dec 30 2019 should be RM1.583 (i.e RM4.75/two-for-one bonus)), which is almost double the current share price of 83 sen. This shows that the current stock price is oversold.

Top Glove did not launch any mega expansion projects in FY2020, when glove prices were high. This strategy enabled the company to avoid unnecessary capital expenditure and keep costs to a minimum during the current difficult times.

Many smaller second and third-tier glove companies are not expected to survive this downward trend in the glove industry.

However, Top Glove is the world's best player in the industry and the company is expected to benefit the most after the smaller glove companies exit the glove industry.

"The recent ringgit weakness of around 10 per cent in the past 12 months has benefited Top Glove because all their products are exported in the US dollars.

Top Glove has been profitable for 10 years. Over the past 12 months, the company earned revenue of RM3.6 billion and earnings of 79.2 per share.

Its operating margin is 58.18 per cent, which ranks better than 99 per cent of companies in the medical devices and instruments industry.

Overall, Top Glove's earnings are ranked eight out of 10, indicating robust profitability.

The company's financial position is also strong, and its growth position is better than 91 per cent of companies in the medical devices and instruments industry.

* The writer is senior lecturer at Universiti Teknologi Mara's Faculty of Management and Business


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