There’s no denying it.
The pandemic has sharply increased the demand for rubber gloves for the healthcare industry.
And one of the biggest beneficiaries of this increased demand is none other than Top Glove Corporation Berhad (SGX: BVA).
The Malaysian glove manufacturer is the world’s largest nitrile and rubber glove manufacturer and has seen demand for its products skyrocket this year.
The group’s share price has also more than quadrupled year to date, as revenue and net profit hit new all-time highs.
The demand has been so strong that the business cannot fill orders quickly enough, resulting in lead times extending up to 510 days.
On the face of it, investors may conclude that Top Glove is confronted with a happy problem.
The group is aggressively ramping up its production capacity to meet burgeoning demand.
The problem of insufficient supply has just been exacerbated by the temporary closure of some of Top Glove’s factories in late November as over 5,100 of its workers were reported to have contracted COVID-19.
16 factories in Meru, Klang has been shut down while another 12 are operating at 20% capacity.
Yesterday, the glove maker released its fiscal 2021 first-quarter earnings. Here are five highlights from the earnings report.
1. Sharp increase in net profit
Revenue for the first quarter ended 30 November 2020 surged 294% year on year to RM 4.8 billion.
Much of the rise was due to continued strong demand for nitrile gloves for the healthcare industry.
Due to burgeoning demand, the group was able to increase the average selling prices of its gloves.
Net profit surged by 20 times from RM 111 million to RM 2.4 billion.
Top Glove attributed the improved performance to quality and productivity enhancements that improved production efficiency and resulted in high utilisation levels.
2. Strong improvement in net margin
Top Glove’s net margin for the first quarter was nearly 50% and was significantly higher than the 9.2% clocked during the same period last year.
It was also higher than the net margin of 41.6% achieved in the company’s fiscal 2020 fourth quarter.
While much of this rise can be attributed to the sharp increase in volumes and selling prices, investors should note that the net margin may be volatile as the group embarks on its ambitious expansion plan.
Also, the rise in raw material prices, specifically natural latex concentrate and nitrile latex, up 13% and 40% quarter on quarter respectively, may erode some of the profits enjoyed by the company in later quarters.
3. Structural tailwind for the glove industry
Management once again reiterated the changing landscape caused by the COVID-19 pandemic, and how this will contribute to sustained growth for the business.
Before the pandemic, the glove industry was experiencing a steady growth of around 10% per annum.
Now, Top Glove estimates that demand will grow by 25% in 2021 and then 15% per annum thereafter.
The reason for this is due to continued usage of healthcare nitrile gloves even if a vaccine has been successfully administered, as there will still be testing needed for COVID-19.
Gloves will also be needed to administer the vaccine.
Also, with an increased awareness for hygiene, more businesses and individuals will request for gloves to protect their loved ones from infection, thus contributing to the higher future growth rate.
4. Quarterly dividends henceforth
In line with the group’s intention to continue rewarding shareholders, management has commenced the payment of quarterly dividends for the current fiscal year.
Based on its stellar performance, Top Glove has declared a dividend of 16.5 sen for the first quarter which amounts to a 56% payout ratio, where six percentage points are considered to be a special dividend.
Note that this dividend alone already exceeds the total dividend of RM 11.83 sen paid out for the whole of the fiscal year 2020.
5. Ambitious expansion plan
As of 9 December 2020, Top Glove owns a total of 36 glove factories located in Malaysia, Thailand, China and Vietnam.
These factories can produce 90 billion gloves per annum and the group employs a total of 21,000 staff.
The group plans to increase its capacity to 129 billion gloves per annum by December 2022, with a total of 42 glove factories, around 33% more than what it can manufacture today.
Plans are also afoot to increase total production by 100 billion pieces per annum by the fiscal year 2026.
A total of RM 10 billion has been earmarked for this ambitious expansion plan.
Get Smart: A blip for Top Glove
The group has not managed to avoid controversy, though.
The Malaysian government had recently opened up 19 investigations into six subsidiaries of Top Glove over offences involving workers’ dormitories.
It alleges that the group’s worker accommodations did not comply with local authorities’ by-laws.
If guilty, the offence could result in severe fines as well as jail time.
Top Glove had also previously come under criticism by human rights groups for debt bondage caused by hefty recruitment fees, where workers’ passports would be forcibly withheld.
In response, the group will spend RM 100 million on workers’ facilities and accommodation, and another RM 70 million on new mega hostels that will be ready by 2022.
While there are mis-steps along the way, these should be a small negative blip for the group as it continues to enjoy healthy demand for its gloves that could grant it strong multi-year growth.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
