To say it’s been a long road and tough learning journey for Top Glove Corporation Berhad (SGX: BVA) would be an understatement.
The world’s largest glove producer has seen its share of ups and downs in the last 18 months.
It started with a surge in orders as demand spiked due to the onset of the pandemic early last year.
Along the way, the group had to deal with a massive virus outbreak at its sprawling dormitories, a ban on the export of its gloves to the US by the US Customs and Border Protection (CBP), and a delay in its plans for a Hong Kong dual listing.
Fortunately, the CBP has been resolved as of last week.
Unfortunately, it was time to face the music for the multiple adverse impacts that Top Glove has had to endure.
When Top Glove released its full fiscal 2021 (FY2021) earnings for the period ended 31 August 2021, investors got the first look at the ugly truth.
Net profit for the fourth quarter of the fiscal year (4Q2021) had plunged by 48% year on year to RM 608 million.
An interim dividend of RM 0.038 and a special dividend of RM 0.016 were declared, bringing total FY2021 dividends to RM 0.651, up more than five-fold from a year ago.
The group’s shares fell by 6.5% to a 52-week low of S$1 after the release of the results.
Here are five other highlights from Top Glove’s earnings report.
1. Multiple factors led to profit drop
Top Glove’s 4Q2021 saw revenue decline by 32% year on year to RM 2.1 billion while earnings per share plunged by 48% year on year to RM 0.076.
Sales quantity continued to weaken, falling from 18 billion pieces in the fourth quarter of last year to 12 billion in 4Q2021.
A multitude of factors led to the significantly lower sales volume and net profit.
First off, Top Glove bore the full brunt of the temporary stoppage of sales to the US due to the CBP’s ban.
Meanwhile, production was also disrupted by Malaysia’s enhanced movement control order (EMCO) due to a spike in infections due to the delta variant.
This production disruption led to a higher average cost as output and utilisation were lower, leading to dis-economies of scale.
On the demand side, customers scaled back on their purchasing as they waited for average selling prices (ASP) to decline, while the roll-out of vaccinations also crimped demand for gloves.
Finally, increased competition from Chinese manufacturers was also a factor for the lower volume.
2. Average selling price continues to fall
Falling ASP continues to weigh on Top Glove’s results, as blended ASP fell by 32% quarter on quarter.
This fall is due to the reasons mentioned above as the initial scramble by countries to increase their stockpile of gloves led to ASP spiking significantly last year.
In the last quarter, Top Glove’s executive director reported a 20% quarter on quarter decline in ASP for nitrile gloves.
Nitrile gloves saw a steeper 37% quarter on quarter ASP decline for 4Q2021.
Other glove categories also saw quarter on quarter ASP declines as prices normalised after hitting an unsustainable high in the prior year.
3. Orders increasing for certain regions
Despite the slower order flow, some regions still posted quarter on quarter growth.
Africa saw a 15% quarter on quarter increase in sales volume while the Middle East saw a 38% surge over the same period.
As glove ASP declined, these regions could afford to order more and this explains the increase in volumes.
At the same time, it’s worth noting that margins for its US glove sales are higher.
As such, Top Glove suffered a deeper decline during this quarter as it bore the full brunt of the US CBP ban. With the ban now lifted, the better margins should be able to offset some of the ASP decline.
4. Spending for future growth
The group continues to prioritise spending for growth, with a budget of RM 1 billion for capital expenditure for the fiscal year 2022 (FY2022).
Of this, 53% will go to the construction of new factories for automation, while 25% will be allocated to a sterilisation plant that can speed up the sterilisation process for surgical gloves and shorten the lead time to market.
Top Glove will also spend around RM 100 million to construct accommodation for 13,000 employees, in line with its plan to ramp up its production capacity to 111 billion pieces by the end of 2020.
5. A commitment to ESG
Top Glove has billed 2021 as its “Year of ESG” as the group focuses on various environmental, social and governance goals.
The group has set its mid-term ESG targets to last till 2025.
Some of these include a reduction in carbon emission and electricity consumption intensity, the creation of job opportunities, and to be included in the Bloomberg Gender Equality Index and Ecovadis ESG assessment index.
Elsewhere, there has been rumblings in Europe to step up enforcement on forced labour in China and Malaysia.
Having gone through the process with the US CBP, Top Glove believes that its certification by an independent consultant should put it in a better position against its competitors on this matter.
Get Smart: ASP should stabilise soon
Despite the challenges, management sees better days ahead.
Glove demand is expected to normalise as countries continue to purchase gloves for use, while CEO Lim Wee Chai expects ASP to stabilise by January next year.
The group is also starting to ramp up exports to the US in September and expects to resume full exports by November or December.
It’s important to remember that some of the issues, such as the US CBP ban and Malaysia’s EMCO are temporary, while the ASP should eventually stabilise.
Meanwhile, Top Glove exited its latest quarter with a net cash position of over RM 2 billion which puts it in the driver’s seat to invest in future growth.
Investors may need to keep the faith a while longer, but next year should be a better year for Top Glove.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.
