Despite a showing strong performance from late-2016 to the first quarter of 2018, the Straits Times Index (STI) has recently turned south, shedding off most of the gains in just six months. This is an example of the natural fluctuations often seen in the economy, known as an economic cycle.

At times like these, there would be many who have different opinions about the direction of the stock market. Some investors may decide to cut loss by selling their stocks, others are reluctant to accept their losses and may choose to lower their average cost by purchasing more shares at the lower price or simply hold on to their positions. Value investors who have remained on the side lines are now actively on the lookout for good bargains.

How many would be able to accurately predict when the market will bottom out in order to achieve the best purchase price? As such time, non-cyclical stocks could be a safer investment choice.

In March 2018, we featured Top Glove Corporation (Top Glove), a non-cyclical stock that was changing hands at around $3.28 per share after doubling its share price since the previous year.

At time of writing, Top Gloves shares last changed hands at $3.85, representing a gain of around 17 percent. Meanwhile, the STI fell over 10 percent during the same period.

The Business

Top Glove is the world’s largest manufacturer of gloves, commanding over 25 percent of the global market share. Having achieved a strong market position, the group now plans to increase its market share to 30 percent and become a Bursa Malaysia Top 20 company by 2020. After which, the group aims to become a Fortune Global 500 company by 2040.

The glove manufacturer currently has 40 factories and 648 production lines with a total production capacity of 60.5 billion gloves per annum.

Following the group’s strong share price performance over the past year, Top Glove current market capitalisation continues its climb to reach $4.9 billion as at 22 October 2018.

Financial Performance

Top Glove - Pic 1

Top Glove’s net profit for FY18 expanded by 32 percent on the back of a 23.6 percent increase in revenue, which broke RM4 billion for the first time. Higher demand from emerging markets lifted sales volume by 26 percent.

For FY18, the group recorded goodwill amounting to RM1.3 billion mainly created from the purchase of Aspion, a surgical glove specialist, in April 2018. Subsequently, it was revealed in July 2018 that there was a conspiracy to defraud the group by Aspion’s former owner Adventa Capital.

Top Glove found out that Aspion may not be able to achieve the profit guaranteed by Adventa Capital as a result of inaccurate historical information provided during the bidding process. The group has since initiated legal proceedings against the vendor of Aspion for alleged fraudulent misrepresentations claiming a sum of not less than RM640.5 million.

Meanwhile, the purchase price allocation arising from the acquisition of Aspion is still on-going. Based on the on-going exercise, the provisional goodwill arising from the acquisition of Aspion is RM1.16 billion.

Growing Demand

The group’s success has been built on the growing demand for disposable rubber gloves, an indispensable consumable item in the healthcare industry. Global demand is driven by various factors such as improving world economy, rise in aging population, rising awareness on infection control and precaution against epidemic-level diseases.

In developed markets, rubber gloves continue to find more uses even outside of the healthcare industry, having already expanded beyond the medical sector to other industries such as food and beverage. This illustrates the immense potential that emerging markets hold.

Strategic Expansion Continues

The group continues its expansion plans with the aim of achieving its ambitious goals. Phases 1 and 2 of the expansion of F32 is expected to be completed in early and end 2019 respectively, F33 is to be completed in early 2019 and F5A by end 2019. The group’s newest factory F8A in Thailand, is scheduled to be operational early 2020.

Upon completion, these will boost Top Glove’s total number of production lines by an additional 98 lines and production capacity by 9.8 billion gloves per annum. By 2020, Top Glove is expected to have 746 production lines and a production capacity of 69.1 billion gloves per annum.

Seeking to expand its operations to Vietnam, Top Glove has entered into an agreement to acquire a piece of land for a factory which is expected to commence operations within the next two years.

Steep Valuations

The market has been very optimistic about Top Glove’s potential. In terms of price-to-earnings (P/E) ratio, Top Glove’s shares are valued at 33.3 times, a level that many would find to be rather steep. The group’s dividend yield is not too impressive as well. After the rise in the group’s share price, dividend yield currently stands at 1.5 percent.

That said, Top Glove is making good progress towards achieving its ambitions. It is during such an expansion phase that a company tends to be spending much money to achieve its goals and investors should only expect to be decently rewarded in the longer term.