Top Glove Corporation Berhad (SES: BVA) is a Malaysian rubber glove manufacturer. The company specializes in face masks, condoms, dental dams, and other products, and operates more than 40 manufacturing facilities in Malaysia, Thailand, China, and Vietnam. It cranks out 90 billion gloves per year and enjoyed steady double-digit revenue growth and 20%+ gross margins while generating ~20% ROC. According to a thesis by MACRO-OPS, Top Glove could be a good investment opportunity. Shareholders of the company can receive 17% return on their investment in special dividends and own the world’s leading glove manufacturer which is preparing for its most profitable years. The company has ample cash reserves, a fortress balance sheet and billions of dollars for expansion, according to the thesis.
Shareholders will get paid fat dividends for 2021’s outlier year of profits. A 70% payout ratio from 2Q – 4Q 2021. The dividend begins 2Q 2021. Shareholders would receive nearly 17% return thanks to the dividend. To get there we took FY 2021 net income estimates minus Q1 2021net income estimates ($673M). That’s not a bad return. And you get to own the world’s leading glove manufacturer to boot!
Top Glove has been performing well. The company issued a special dividend to allow shareholders to capture 17% returns at current prices. Despite a short-term COVID-19 scandal, the company made good revenue and business growth over the last months.
A short-term COVID-19 scandal rocked the company and sent shares plummeting 43% since its October 2020 high. Yet during that time BVA grew revenue 305% and expanded GM to 65%. Thanks to the 43% haircut investors can buy the world’s largest glovemaker (~26% global share) for <4x EBIT and 2x revenue. Its competitors on the other (glove) hand trade for an average of 5x EBIT and 2.58x revenues.
COVID-19 hit businesses very hard around the globe but it also created a tremendous opportunities. The demand for gloves is expected to remain high over the coming years. So, Top Glove will get an big opportunity to further grow their business in the coming years.
The Malaysia Rubber Gloves Manufacturer Association estimates 518 billion glove pieces produced by 2022. That means 25% growth next year and 15% growth in 2021. If Top Glove captures 25% of global demand, they’d sell 130 billion glove products in 2022. The company grew revenues 161% and 293% over the last two quarters. It is set to grow revenues “200% year-over-year in what can only be described as an unsustainable top-line growth rate,” according to the thesis.
While Top Glove benefited from record sales and profits last year, it faced some problems. Its Malaysian facility became the hottest COVID infection site in the country, infecting over 2,400 workers. The company was forced to shut down, and it also experienced labor issues and was banned from selling products in the U.S. due to concerns over forced labor in their factories.
Not to mention the general shutdown of their plants after their COVID outbreak. Together, these issues brought share prices down 40%+ in the last three months.
Notwithstanding the risks, there are two more dangers in this investment: Currency risk and raw material risk. Weakening MYR benefits the company, and a steep rise in the raw material cost bucket would force the firm to either raise prices or eat away existing margins.
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