2020
came and went. Whilst it is a watershed year, it is nonetheless a year
that investors in the stock market will never forget. Apart from myself,
many have studied, analysed and commented on the glove sector including
specific glove companies. Amongst all sectors, the glove sector is the
most crowded in terms of analysis and scrutiny. After all, it is a
uniquely Malaysian Cinderella story. I have read many wonderful
observations & analysis, am thankful for the sharing. I can tell
from the articles, voluminous amount of work have been done by fellow
writers. There is one author I particularly fancy, Ben Tan. The amount
of detail and work done is impressive.
As per my past writing, my favourite Glove stocks which I deemed are long term value stocks would be Riverstone Holdings Ltd, Hartalega Holdings Berhad and Sri Trang Agro. Each of these stocks are listed respectively on SGX, Bursa and SGX / SET (dual listed). Rest assure, this article is not about their wonderful results and record breaking earnings or cash position. Instead, I will spent this article mostly showing readers the performance of the stock price in the past 1 year since the start of the pandemic, towards its peak and its selldown.
1. Riverstone (Adjusted for 1 for 1 bonus)
2. Hartalega
3. Sri Trang Agro Industry PCL
For ease of reference, I took the stock price of each glove companies from mid April to today's closing market price.
- Riverstone rose from SGD 62 sens to SGD 1.31 - An increase of 111%
- Hartalega rose from RM 7.25 to RM 9.41 - An increase of 30%
- Sri Trang Agro rose from THB 11.70 to THB 48 - An increase of 310%
How about the profits and cash position increment for each of this company?
- Riverstone revenue rose 85%, net profit rose 396%, dividend rose 6X and cash position rose 398%
- Hartalega revenue rose 123%, net profit 536%, dividend rose 6X and cash position rose 1211% (conservative estimate using similar revenue (RM6.5 billion), net profit (RM 2.76 billion), dividend (48 sens) and cash position (RM 4 billion) based on Q3 FY 21
- Sri Trang Agro revenue rose 25%, net profit rose (loss of THB 149 million to THB 9.5 billion), dividend rose 5x and cash position rose 1010%.
Because
the companies have different reporting timeline, so it is hard to
compute full year results as comparison. However, based on what I
provided above, record results (best have yet to come, likely the next
quarter), you can use it as a gauge to compare the valuation vs the
current share price. Well, surely seasoned analysts or those with
contradicting view will surely argue, 2020/2021 is a one off event due
to the century pandemic. Hence, must discount it and not factor the
calculation in such manner. Also must compute it against 2022 or even
2023. This is where I would like to point out an important distinction
which some failed to appreciate.
Every stock
has a company behind it, and every company has an intrinsic value. The
intrinsic value is what determine what the company is worth. In essence,
the stock price is a manifestation of the intrinsic value. The argument
then lies with how to compute the intrinsic value. Of course, it is
somewhat a mixture of science and art. One thing is for sure and most
would agree, an important metric to look at is earnings. For me, to
know the intrinsic value, it is important to value the company based on
(Assets - Liabilities = Equity) + Ability to earn / grow profits +
Ability to sustain profits + Ability to pay dividends. Apart from that,
Retained Earnings which is part of Equity is an aspect that is
overlooked by investors. In short, we can conclude the higher the
company's retained earnings, the more valuable the company is. This is
in fact, highlighted not by me, but by Warren Buffet in his recent
Annual Letter to Berkshire Shareholders 2021. You can read this passage
here -
So
this is where I would like to draw your attention. Whenever I read
articles saying "gloves are overvalued", I am often bemused by the
ignorance of individuals who make such shallow comments. The value of
a company does not diminish or gets eradicated once supernormal profits
disappears. This is simply because when a company makes profits, the
profits translate to retained earnings and of course the retained
earnings can then be used for other things like paying dividend,
investments or future capital expenditure. The supernormal profits may
reduce like how Covid-19 reduces but the value of the company does not
reduce unless it starts making losses overnight. The higher the profit,
the higher the retained earnings, the higher the value of the company.
In essence, the company's value holds itself and that is why share
price maintains at a certain level. Even if next year or following year
the earnings fall, the value built and accumulated do not get wiped out
unless the retained earnings are deployed egregiously resulting in
losses to the company. It is absolutely wrong to equate the share price
chart of gloves, to the Covid pandemic infection & death rate chart
in direct correlation and absolute terms.
Owens
& Minors is one of the notable PPE maker and supplier in US. It has
a history of over 100 years. Despite the vaccine roll out and all the
talks of pandemic being over, the share price continue to perform and
sustain in tandem with the earnings. This is due to the structural
change and hygiene behaviour pattern following Covid-19. Investors are
knows the importance of such company now and appreciates its retained
earnings, future earnings visibility and accord it higher value compared
to before. None is rushing to take profit the way it is happening in
Bursa. In fact, the performance of Owen & Minors shows the major
flaw in the thesis of a Foreign IB research report.
Mercator
Medical, the superstar polish glove maker that rose to fame on the back
of the pandemic is still 7X its stock price back in April 2020 and
sustaining well even after falling from the peak of PLN 770 to what it
is today. We must remember, Mercator unlike our Big 4 did not even enjoy
the same level of global reputation and standing yet it is sustaining
much better than the price action of our local glove makers.
Intco
Medical needs no introduction anymore. It is one of the top two glove
players in China which have recently came on the news touting to build
190 billion glove capacity factory in the coming years. As a background,
Intco traditionally is a vinyl glove maker and one of the largest in
the world. Vinyl gloves are also known as "poison plastic". Seeing the
demand and value paid for nitrile gloves, Intco is venturing big and
even raising US 1 Billion on a secondary listing in Hong Kong to achieve
this. Although its capacity is only 20+ billion now with more than 60%
production in Vinyl gloves, the stock price have continue to risen and
sustained very well. To put things into perspective, Intco Medical
market cap today is bigger than Top Glove and Hartalega. It is also
bigger than Supermax + Kossan + Riverstone + Comfort + Careplus + UG
healthcare combined. Is Intco medical such a good glove player and ours
so inferior to China’s glove maker? Does this make sense?
Looking
at the stock price performance of other glove makers which have been
through a superb record shattering 2020, for the stock price to revert
almost back to where it was despite the profits, cash and balance sheet
strength defies logic. The irrationality and emotions flooding the
market is not only retail investors. In fact, I think the retail
investors in Malaysia have done very well and held on to the conviction
in the face of huge RSS selling, institutional selling. I take my hats
off to them as it is extremely tough to go up against such adversity. The age old adage which states, "the market can stay irrational longer than you can stay solvent" is absolutely true.
Zoom was one of the hottest tech stock which captured everyone attention due to the pandemic too. It was the poster boy of pandemic so much so the stock itself went up 7 times to a peak of US 588 with a market cap US 172 billion. It even helped Li Ka-Shing recapture his title of Hong Kong's richest despite the impact that rampage through his notable companies CK Hutchinson, CK Assets and others. Why I am sharing this is to show you even though Zoom was regarded as the face of Covid-19 beneficiaries due to the work for home need for video conferencing, it still managed to stave off the plunge when the vaccine was developed and funds rotated towards recovery plays. Even outside of the sector, stocks like this can retain its value due to the "new normal" and "value of the company" which was brought to light resulting from the pandemic. Otherwise, Zoom may still take its time to jostle for attention of major funds and investors.
One
of my favourite boxing movie is Cinderella Man, by Russell Crowe. It is
based on the real life story of James Bradock who was injured and had
to work in the docks during the Great Depression just to survive. He
returned to competitive boxing in order to make a living for the family
during the most challenging time and despite being an underdog, he rose
to the occasion to dethrone the incumbent and became the heavyweight
champion. His nickname was the "Cinderella Man". The glove makers in
Malaysia are tales of Cinderella, rags to riches and underdogs to world
domination. It took 30 years to get to where they are. When the time
came for them to rise to the occasion, they performed and delivered
extraordinarily.
History have shown, whenever the glove sector retraces, it has never gone back to previous low and it forms a higher low each time. However, most people painted doomsday scenario such as price war and oversupply yet in the end the sector prove them time and time again they were wrong. Indeed, China capacity may be scary but ultimately they don't have the expertise. In terms of efficiency, our glove makers still have at the upper hand. Glove making especially Tier 1 quality is not as simple as making mask. As for the US wanting to build their capacity, at the first place back in the days, their manufacturers chose to disposed all these assets as they they find it low value in nature and could not compete hence adopting the OEM model.
History have shown, whenever the glove sector retraces, it has never gone back to previous low and it forms a higher low each time. However, most people painted doomsday scenario such as price war and oversupply yet in the end the sector prove them time and time again they were wrong. Indeed, China capacity may be scary but ultimately they don't have the expertise. In terms of efficiency, our glove makers still have at the upper hand. Glove making especially Tier 1 quality is not as simple as making mask. As for the US wanting to build their capacity, at the first place back in the days, their manufacturers chose to disposed all these assets as they they find it low value in nature and could not compete hence adopting the OEM model.
I
believe investors need to ask themselves what is their investment
horizon, ability to hold (no margin, no leverage) and stomach the
emotional rollercoaster. I do not deny sentiment plays a part in
investing. Herd mentality, fear and greed swings share price. However,
as a true fundamentalist, I invest based on the value I see in the
company. I have great faith in Riverstone and Hartalega for the reasons I
have shared before and have a long investment horizon. Ultimately,
investors must know the value of the company behind the stock price in
order to determine the best course of action.
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Food for thought:
https://www.tradeview.my/2021/03/tradeview-2021-should-investors-take.html
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