SINGAPORE (June 19): Thanks to Covid-19, personal protective gear are now red-hot commodities. Investors and analysts have also jumped onto the bandwagon, scooping them up with fervour. Several Singapore-listed glove-makers are enjoying a surge in both trading volume and prices as they experience “supernormal” earnings growth. As at June 9, Top Glove saw an average daily turnover of $1.03 million, up 3,764% since the start of the year. Meanwhile, UG Healthcare generated $2.51 million, up 20,991% while Riverstone Holdings logged a daily average of $3.02 million, up 1,744%. Year to date, Top Glove was up 3.07% to close at $5.05 on June 18, Riverstone was down 3.75% to $2.31 while UG Healthcare was up 0.63% to 80.5 cents.
At the start of the pandemic, these glove-makers — all based in Malaysia — were valiantly trying to meet the surge in demand. It proved a challenge during the Movement Control Order (MCO) which cut their onsite manpower by 50%. Since then, these companies have expanded their production levels through higher factory utilisation.
Top Glove — which produces one in five gloves globally — increased its factory utilisation by 10% to 95% in March. It is now making some 200 million natural and synthetic rubber gloves a day. This translates to an annual production capacity of 78.7 billion gloves, says its executive chairman Lim Wee Chai. In its 3QFY2020 ended May, Top Glove’s earnings soared over three-fold to RM347.9 million ($113.2 million) from RM64.7 million a year ago. On a fully diluted basis, this translates to EPS of 13.15 sen, compared to 7.28 sen a year ago. This marks the company’s best performance in its 29-year history and already makes up 95% of the company’s FY2019 earnings of RM364.7 million.
The company is expecting further gains ahead. “Prepare to watch us break our own record in the upcoming quarters, because our best days are still ahead,” said Top Glove’s executive director Lim Cheong Guan at a virtual press conference on June 11. It was quick to reward shareholders too, declaring an interim dividend of 10 sen per share, up from the 3.5 sen paid out in 3QFY2019. The huge boost in earnings came from the 41.9% y-o-y increase in revenue for the quarter to RM1.7 billion. This follows an “unprecedented” increase in monthly sales orders from governments, companies from the medical and non-medical sectors, as well as existing clients, the company says. Initially, orders came mainly from China, Hong Kong, Singapore and South Korea. “In recent months, we have received strong sales orders from Europe, the US and other countries too,” he adds.
Bigger volumes, higher prices
Aside from a bigger order book, Top Glove’s income was also boosted by a 9% y-o-y increase in the average selling prices (ASPs) of gloves. This resonates with Wong Teek Son, executive chairman and CEO of Riverstone, whose company has also benefited from the higher prices. “Everyone is looking for gloves, so when the user or distributor comes to us, they keep raising the bar by offering a higher price,” he says. “Earnings are most sensitive to changes in ASPs, compared to sales volumes and costs,” concurs Maybank Research analyst Lee Yen Ling. “Prior to the ASP hikes in March, we estimate that every 1% increase in medical glove ASP would result in a 5-8% increase in net profits,” she adds.
Breaking this down further, Wong says that the increments in ASP differ for different buyers. For instance, prices for long-term clients, particularly hospitals and medical providers, are controlled and can only be raised by a maximum of 10%, while medium-sized buyers are slapped with a 20% increase in prices. Spot buyers are also charged between 2 to 2.5 times more. “For now, we don’t have a lot of spot orders, so we are looking to increase our focus on this in the short and longer term when our new facility is ready,” Wong adds.
Riverstone claims a market share of 60% in supplying Class 10 and Class 100 gloves, which are used primarily for high-tech manufacturing operations. It was only in the last decade that it ventured into the healthcare glove segment in a bid to balance the cyclically-sensitive, higher
margin-yielding clean room segment with the lower margin and lower-yielding healthcare segment, says Wong. Riverstone can make 25 million gloves a day at full capacity. Last year, the company made 8 billion gloves — 85% of which was for the healthcare sector. At present, it has the capacity to make 50,000 face masks a day.
In its recent 1QFY2020 ended March, earnings for the maker of glove and face masks soared 54.3% to RM46.6 million, from RM30.2 million a year ago. Revenue was up 16.2% to RM297.4 million, from the RM30.2 million in 1Q19, led by robust global demand. A further boost in earnings came from a downtrend in the price of butadiene, a raw material used to produce Riverstone’s nitrile-based gloves. This strengthened the company’s gross profit margin by 4.6 percentage points y-o-y to 24% in the quarter.
Meeting demand
While Top Glove and Riverstone are posting significant profits, they have yet to meet demand. Riverstone, for example, has a strong order pipeline till March 2021 but is unable to deliver before then. “We are fully booked,” says Wong. “So, even if a customer offers us a very high price, we cannot provide an earlier delivery date because we are already committed to other customers,” he adds.
Top Glove also faces a longer delivery lead time of 400 days in 3QFY2020, compared to the 40-day time frame it previously adhered to. It is looking to further expand its capacity from 8%–10% to 12%–15%, once the pandemic abates. For this, it has earmarked RM8 billion to build 450 new production lines between 2020 and 2026. These facilities will allow the company to build 60 billion additional pieces of gloves a year.
The company is also looking forward to completion of phase one of its Top Glove Innovation Complex at Factory 42 in Banting in 2QFY2022 where it will further its manufacturing and research capabilities. “Gloves are an essential item in winning this war on Covid-19. It is a tremendous privilege to be in a position to help protect people in Malaysia and throughout the world from this dangerous virus,” says executive chairman Lim. “We will continue to work safely and efficiently to produce as many gloves as possible at this critical time”.
With cash and cash equivalents of RM347.8 million, Top Glove is in good stead to see through these expansions. In fact, its strong performance in 3QFY2020 boosted its net cash position which had been in negative territory since the company’s RM1.37 billion acquisition of surgical glove producer Aspion in 2018.
Similarly, Riverstone’s Wong has adopted a multi-pronged approach to meet demand. Between July to November, he is looking to add a new production line each month, such that its capacity can increase by 15.6% to 10.5 billion pieces per annum by 4QFY2020 ending December. Come next year, he will add seven lines, giving the company an additional capacity of 1.4 billion. In the longer term, Wong is looking at a three-phase expansion plan between 2021 and 2023 through the construction of a facility at a 20-acre plot acquired in Taiping, Malaysia. Responding to queries on excess capacity once the pandemic abates, Wong says this is not a concern. “The production lines are interchangeable — right now we are doing 85% healthcare gloves and 15% cleanroom gloves because of the demand. But, we can change this and use the lines to produce gloves for industrial purposes such as for usage at the slaughterhouse or food & beverage companies,” he explains.
As at end March, Riverstone’s cash and cash equivalents stood at RM170.7 million, up from RM130.3 million a year ago, giving the group sufficient funding capacity to execute its expansion plans. Just like its peers, UG Healthcare is experiencing overwhelming demand for its gloves and ancillary healthcare supplies. The company, which is now running at full capacity, makes 2.9 billion pieces a year and plans to expand the capacity.
Analysts positive
Given the counters’ strong order pipeline and earnings, Maybank’s Lee says bracing for an earnings explosion in the coming quarters, particularly in 2H2020. The analyst has a “buy” call and target price of RM21.90 ($7.13) for Top Glove, up RM1.90 from her previous RM20 call. Lee’s move follows expectations of a 15% month-on-month hike in ASPs of gloves between June and August, with spot orders to account for 20% of volume. “Even if a vaccine is developed, management remains confident that the demand will be solid in 2021 on stock replenishment activities and the emergence of new glove users,” she says in a June 12 note.
Meanwhile, Riverstone is favoured by CGS-CIMB analyst Ong Khang Chuen. “We continue to like Riverstone for its attractive valuations (33% discount to Malaysia-listed glove sector average 2021F P/E of 24.7x),” he said in a June 11 note. Ong is maintaining his “buy” or “add” call on Riverstone at a revised target price of $3.12. This is up 62 cents or 24.8% from his previous $2.50 call. He expects the company’s profits to increase by 102% y-o-y to RM72 million in 2Q2020F ending June. For the full year, he is looking at a 141% y-o-y increase to RM314 million.
“Our recent channel checks reveal that Riverstone continues to see strong demand for gloves, both from its key existing customers as well as new buyers. We estimate that its order visibility for healthcare gloves has extended up to end 1QCY2021 (March 2021), from end CY2020 (December) previously,” he says. But will the demand sustain into next year? Given how quickly their share prices have run, at least one market observer is urging caution. The broader market remains volatile and even quality blue chips suffer from occasional bouts of indiscriminate selling. Thus, investors should not chase after the latest hot fad blindly, says W Capital’s Wayne Lee. “It may be good to hold off for a bit to get a better deal,” he adds.
