SI Research: Top Glove Corporation – Probably The Best Non-Cyclical Stock
From time to time, the economy experiences natural fluctuations of expansion and contraction, also known as an economic cycle. In the stock market, having the skills to accurately forecast the changes in an economic cycle almost guarantees success.
However, due to the myriad of factors involved, it is unlikely that the average investor would be able to time the market as accurately as a sophisticated investor. However, do not despair as it is not entirely necessary to be able to time the market in order to receive a decent return from the stock market.
Although non-cyclical stocks do not benefit much from a growing economy, it is largely immune to the effects of an economic downturn. Common examples of non-cyclical stocks include utility companies, household consumables and tobacco.
In line with the concept of risk-return tradeoff, non-cyclical stocks are of relatively lower risk and hence inherently deliver lower expected return. This issue, we take a look at Top Glove Corporation (Top Glove), a non-cyclical stock that has doubled in share price over the past year.
The Business
Top Glove is the world’s largest manufacturer of disposable rubber gloves. Having captured over 25 percent of the global market share, the group fulfills demand in both healthcare and non-healthcare segments with exports to 195 countries worldwide.
Started as a local business enterprise with a single factory and three production lines in 1991, the group has grown steadily and is now listed on both the Malaysian Bourse and on the Mainboard of the Singapore Exchange.
The glove manufacturer currently has over 30 factories and 550 production lines with a total production capacity of 51.9 billion pieces per annum.
Following the group’s strong share price performance over the past year, Top Glove current market capitalisation has surged to $4.2 billion.
Financial Performance
Top Glove’s net profit for 1H18 grew 37.1 percent on the back of a 15.9 percent increase in revenue. Higher demand for natural rubber gloves is coming from emerging markets, where healthcare awareness and hygiene standards are rising steadily, particularly in South East Asia and Eastern Europe which respectively saw a 60 percent and 40 percent boost in sales volume. In line with the increase in sales volume, a higher utilisation rate contributed to the 1.5 percentage point increase in gross profit margin.
Growing Demand
Much of the group’s success can be attributed to the growing demand for disposable rubber gloves. Currently, it is estimated that 18 percent of the world’s population, mainly from the US, the European Union and Japan, accounts for 70 percent of global glove consumption. This implies that the usage of gloves is relatively low amongst the remaining 82 percent of the world’s population, making up the remaining 30 percent.
Emerging markets such as Africa, the Middle East, Latin America and Asia hold much growth potential for the group. Meanwhile, glove usage in developed markets such as North America and Europe are also expanding beyond the medical sector to other industries such as food and beverage. According to industry sources, emerging markets are expected to drive global rubber glove demand to increase by approximately at least eight percent yearly for the next few years.
More Expansion Plans
The group does not intend to kick back and relax despite its commendable achievements over the past 27 years. With an aim to become a Fortune 500 company, Top Glove continues its expansion plans to grow through both organic and inorganic means.
The group’s two new manufacturing facilities, Factory 31 and Factory 32, are expected to be operational by March 2018 and December 2018 respectively. Upon completion the group’s total number of production lines will be boosted by an additional 78 lines, adding 7.8 billion gloves per annum to its capacity.
In addition, Top Glove also plans to launch its own condom brand and the manufacturing facility is expected to start operations by July 2018. The group could potentially leverage on its 2,000 to 3,000 customers for its glove business that are also buyers of condoms.
Valuations
In terms of price-to-earnings (P/E) ratio, Top Glove’s valuations may not be too attractive. The sector trailing P/E ratio is currently at 22 times, while Top Glove’s trailing P/E is at 32.5 times, far above the sector’s average.
Dividend yield would have been a brighter area. However, after the rise in the group’s share price, dividend yield currently stands at 1.4 percent. Although Top Glove registered a strong 1H18 financial performance and is well on track to a stellar ending on 31 August 2018, it is still unlikely for a higher dividend payout to bring the group’s yield to surpass last year levels.
That said, investing in a company like Top Glove is more suitable for long-term investors. After all, Top Glove hardly needs to be concerned about the economic outlook as the increasing hygiene awareness continues to drive up the demand for disposable gloves.