Home Growth Companies 3 Reasons Not to Go Lovey Glovey Over This Stock

3 Reasons Not to Go Lovey Glovey Over This Stock

Editor’s note: We are running a bull versus bear series for Top Glove. The following is a bearish take. For the bullish view, click here.

The COVID-19 pandemic has taken the world by surprise.

Countries and its people rushed to stock up on gloves and masks, which led to Top Glove Corporation Berhad’s (SGX: BVA) revenue skyrocketing.

In its fourth-quarter financial results ended 31 August 2020, the Malaysian glove-making company announced a spectacular set of results.

Revenue was up by 161.3% year on year, from RM1.2 billion to RM3.1 billion in the fourth quarter of 2019 and 2020, respectively.

Profits rose 16-fold year on year, from RM74 million to RM1.3 billion in the fourth quarter of 2019 and 2020 respectively.

Compared to the start of 2020, its share price is up 457% from S$0.51 to S$2.84.

This begs the question, does the stock still have upside potential?

Today, we will dive deeper into the reasons to be wary of Top Glove.

High expectations

Before the crisis, Top Glove was viewed as a reliable dividend stock.

Investors were drawn in by its stable dividends and consistent revenue stream.

With the pandemic, Top Glove has received a lot of attention as a growth stock.

Throughout the last few months, its stock price was propelled by an increase in sales and a more sanguine growth outlook.

There are high expectations from a portion of its investors for sustained or even growing revenue numbers.

In the book “Your Money and Your Brain” by Jason Zweig, the author explores the power of anticipation.

He quotes an example of the medical research company Celera, which upon reaching its goal of decoding the human genome, experienced a plunge in share price.

The anticipation of success was so great that when it finally happened, the reality felt disappointingly mundane.

In my opinion, Top Glove is in a similar plight.

Beating estimates is often a reason for share price increases, with the converse also being true.

Top Glove faces high expectations from investors due to the effects of the pandemic, and the company has enormous shoes to fill.

Difficulties in maintaining market share

Given the circumstances, we can feel certain about the strong demand for products that Top Glove manufactures, such as gloves and masks.

However, will Top Glove be able to maintain its market share?

The glove-making business is considered to have low barriers to entry. It sells commoditized products, with high substitutability between competitors.

Within Malaysia, there are currently seven listed glove companies, with two more looking to IPO in the near future.

Additionally, companies around the globe are recognising the surge in demand for personal protective equipment (PPE).

According to the World Health Organisation (WHO), PPEs include gloves, masks, gowns, face protection, and rubber boots.

Throughout Asia, garment factories are converting their manufacturing facilities from clothing to PPEs.

Lower demand for clothing and soaring demand for PPEs have been the reason for this switch.

While there are many parties that rely on Top Glove for their products during these times, there will be an undeniable increase in competition which the company must contend with.

This may result in the dilution of its market share over time.

Uncertainties about the future

Aside from companies, governments are also scrutinising the glove-making company for different reasons.

Out of the 13,000 workers at Top Glove’s factories, an estimated 11,000 are sourced outside of Malaysia. They are mainly from Indonesia, Bangladesh, Nepal, and Myanmar.

Top Glove relies on recruitment agencies within those countries for hiring, which occasionally goes through an additional intermediary agency in Malaysia.

These layers of bureaucracy result in the workers paying high fees to obtain work at Top Glove.

Since July, the company has been facing labour abuse allegations from the US and New Zealand.

The U.S. Customs issued a detention order on the products imported from Top Glove, citing a suspected usage of forced labour.

New Zealand’s top supermarket chain and medical supplier, Foodstuffs and Ebos, have both banned the import of Top Glove products.

Similar allegations made against the unethical standards during rubber glove production were the reasons for the ban.

In a world where protectionism and human rights are increasingly emphasized, Top Glove is facing the repercussions.

The company faces a long road ahead to appease its global audience as it seeks to expand its network worldwide.

While many companies have struggled to survive in this pandemic, Top Glove has experienced supernormal profits because of it.

This blessing is also a curse.

The company has unwittingly been associated with the spread of the COVID-19 virus.
For example, recent news of a vaccine in Russia caused the glove-making company’s share price to plummet.

These price dips should be expected for months to come, as the world races to develop a vaccine to end this nightmare pandemic.

Get Smart: Risks abound

There is no denying that the world’s leading glove-making company has had an outstanding year, with surging profits to boot.

However, investors should not be focused on only the positives.

The risks stated above may cause you to think twice about investing in this “sure winner”.

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Disclosure: Zachary Lim does not own shares in any of the companies mentioned.