This article will be very unpopular. But let me say that I am a fan of the Malaysian glove business, you can search my posts. I was very surprised by the recent developments in glove valuations not only by retail investors, but also by analyst recommendations. Let me take the largest of the glove manufacturers – Top Glove, which is the largest manufacturer today. I have no doubt that supply and demand are out of whack. However, how is it that the estimate can be so high.
Two analysts put it at around RM20, another at RM23. Today, the price of Top Glove is around Rs 15.60. This translates to an estimate of RM52.6 billion, RM60.5 billion and RM41 billion respectively. Numbers are just numbers. I take these numbers and try to present what they base this valuation on and what the risks are in choosing these prices, especially at RM23 and RM20.
Below are the most aggressive numbers based on an estimate of RM23. The analyst presented numbers for the next 3 years from 2020 to 2023 and was tight-lipped about the following numbers. Obviously the next 2 years will be a period where the numbers will be very high – I’m not disputing that. I think even in 2022/23 (RM836.6 million PAT), if earnings double from the normal period of 2019/20 is a stretch.
However, let’s just say that I will be very optimistic, ie. after the 2022/23 period. it will grow at 10% per year for the next 6 years. Based on the above situation, I presented 3 situations ie. at which average PE price would the company get RM23, RM20 and RM15.60. The 10 year PE averages will be very high indeed at 64x (RM23), 55.5x (RM20) and 43.3x (RM15.60)
To go on the more modest side, I wouldn’t dispute the numbers for the next 3 years, but let’s put the PAT for 2023/24 as a more realistic figure. After 2023, PAT will fall by 20% – even then it will be 84% higher than in a normal year, i.e. 2019/20. In the future, the profit figures will grow by 5%. This translates to 80.51x PE at RM23, 70x PE (RM20) and even a very high 54.61x PE at the current price of RM15.60.
Even at a price of RM10 (which we cannot expect considering it is currently at RM15.60), the average PE would be 35 times higher given the scenario above. See the table below. It’s still high.
Now let’s look at the economics of rubber gloves.
Remember, rubber gloves, although it is difficult to create enough supply to meet demand in today’s situation, we are saying that supply and demand will still be abnormal after COVID-19. In fact, with the creation of additional capacity in large volumes, it is possible that a situation of redundancy may arise by then, that is, 3 years after the start of this pandemic on January 20.
Rubber gloves are not a monopolistic business, although there are situations where some companies such as Top Glove, Kossan and Hartalega are the larger manufacturers. Are we saying that with COVID-19 still around these 2 years, these guys won’t be ramping up supplies that will act as checks and balances against each other competitively? What about other players?
How long does it take to build new factories and new lines? More than a year?
I don’t see the economics of it as this business is not in a situation where the barriers to entry are very high. Neither player has a huge advantage over the other, except for some added efficiency and economies of scale. Given the huge margins today, many new companies won’t even bother with scale. There could even be new entrants – have any of the analysts thought of that given it’s so profitable?
There are too many unknowns, and many are not considered. Many businesses, by setting a price that is too high, risk being eliminated when the situation normalizes. As a rule, this business is about long-term relationships. I understand that some of them have created a new idea by putting a percentage of their supply on the spot market (meaning it will be done through bidding). However, this is not how business is conducted. This is not our typical product.
