Here's what TOPGLOV (7113): TOP GLOVE CORP BHD has to say about sustaining its super profits
KUALA LUMPUR (Dec 12): The world's largest rubber glove maker Top Glove Corp Bhd's latest record-breaking net profit surged past RM2 billion, backed by strong demand for gloves in both developed and emerging markets, thanks to the pandemic.
But behind this super profit, the group has been dogged by issues ranging from import bans in the US market over allegations of forced labour, a surge of Covid-19 infections among its workers that has halted half its production capacity, and possible legal action by Malaysian authorities for housing its workers in cramped and poorly ventilated accommodations that do not meet minimum standards set by the law.
Add these to the flood of news about imminent availability of an effective Covid-19 vaccine, it's not surprising that Top Glove's share price has been sliding, despite the company's persistent share buyback efforts to arrest the decline, with over RM1 billion spent so far. This week, the share-purchase baton was picked up by its founder and chairman Tan Sri Dr Lim Wee Chai, who bought RM29.77 million worth of Top Glove shares.
Yesterday, JP Morgan initiated coverage on its stock, but with a fair value of RM3.50 — about half its last traded price of RM6.90 — as it sees the passing of a supernormal growth cycle for glove makers, in anticipation of a huge oversupply in the market, as glove demand decelerates in tandem with the pace of testing for Covid-19. Rising costs are also expected to eat into profitability.
So what does Top Glove have to say about sustaining its super profits? Below are its chairman's written answers to some questions posed by The Edge after the release of its first quarter results.
Question by The Edge: Your profit margin stood at 49.9% in the first quarter ended Nov 30, 2020 (1QFY21). Is the current profit margin sustainable?
Answer by Lim: The coming quarters performance will be better with below reasons:
1. Additional new capacity
2. Higher nitrile gloves mix by switching some latex capacity, and sufficient Nitrile Butadiene Rubber (NBR) latex
3. Higher ASP which is in line with market prevailing price
4. Demand continue to increase underpinned by in both healthcare and hygiene awareness
Q: It is noticed that Top Glove has conducted share buybacks during the one-month blackout period before the release of the quarterly results. Are companies allowed to do that under listing rules?
A: There is no blackout period for companies to buy back shares. The blackout is for directors and principal officers of the company.
Q: Will the company continue to buy back its own shares? If so, what is the budgeted amount for this exercise?
A: The company will evaluate the need for share buy back on an ongoing basis, taking into account the share price, the potential earnings, the available cash in hand.
Q: Top Glove has spent a total of RM2.5 billion to pay dividends and buy back its own shares now. How will its cash pile be like, moving forward?
A: The group is now in a net cash position and will continue to be in a net cash position, with an increasing trend of cash flow from operating activities, which we expect to further increase its cash position.
Q: Sitting on a net cash of RM3.46 billion now, will Top Glove invest more in investment securities?
A: Investment securities is not investment in quoted shares in listed companies. It is an accounting terminology for cash in hand that we placed in money markets to gain better returns than FD (fixed deposit).
Q: With its net cash position now, will Top Glove redeem the perpetual sukuk that was issued on Feb 27, 2020 to raise RM1.3 billion?
A: The sukuk is a long-term funding and we evaluated it for long-term cash planning purposes, when we raised the fund.
Q: Can you explain what are these contract liabilities worth RM1.09 billion listed under your balance sheet?
A: These are the deposits collected for customers for future orders.
Q: For Tan Sri, since you are a substantial shareholder of Tropicana, were you aware that Tropicana purchased over RM70 million Top Glove shares recently?
A: Please refer to Tropicana’s Bursa announcement in this link. Tan Sri Dr Lim is the non-executive chairman of Tropicana and he was not involved in the deliberation and decision of such investment.
Q: Following the strong 1QFY21 earnings of RM2.38 billion, what are your earnings' expectations for 2QFY21?
A: Please refer to the response for Question 1 above.
Q: Has there been any indication from the US Customs and Border Protection on when it will revoke the import ban on the company's two subsidiaries? Will sales to the North American market continue to slip in 2QFY21? (1QFY21 dropped 2% on-year)
A: We continue to actively engage with the US Customs and Border Protection towards the expeditious upliftment of the Withhold Release Order (WRO), for which it is making good progress. The sales drop to North America was also due to shortage of NBR supply and also the EMCO (enhanced movement control order); the coming quarter should be higher due to sufficient availability of NBR latex and with new capacity in nitrile.
Q: Has the company made any provision for the penalty of breaching the Workers’ Minimum Standards of Housing and Amenities Act 1990 (Act 446)? What is the amount you are expecting from this?
A: Top Glove is working very closely with the authorities related to this issue to ensure the compliance of the Act.