Top Glove Corp Bhd has been a frequent winner at The Edge Billion Ringgit Club (BRC) since 2018. The world’s largest rubber glove maker bagged the highest return on equity (ROE) over three years in the healthcare sector award this year — its second since 2018. Top Glove had previously won two awards for stellar total returns as well as earnings growth over three years.

Thanks to record earnings for FY2021 when Covid-19 caused demand for gloves to surge to unprecedented levels, Top Glove’s adjusted weighted ROE skyrocketed during the award’s three-year review period of FY2019 to FY2021.

From only 14.8% in FY2019 and 47.3% in FY2020, its ROE came in at an astounding 143.5% in FY2021, which translates into an adjusted weighted ROE over three years of 88.9%.

The group continued to have a good run last year after delivering a record-high annual net profit of RM7.87 billion in the financial year ended Aug 31, 2021 (FY2021), a whopping 349% over the RM1.75 billion achieved in FY2020. It is worth noting that the FY2021 profit after tax of RM7.87 billion exceeded that of the past 20 years (FY2001 to FY2020) of RM5.4 billion.

Its revenue for FY2021 also more than doubled to RM16.41 billion compared with RM7.24 billion previously.

The world’s largest rubber glove maker attributed the bumper financial performance for FY2021 to robust glove demand coupled with elevated average selling prices (ASPs) driven by the ongoing pandemic.

Prior to the outbreak of the Covid-19 pandemic, the group posted an annual net profit of RM364.67 million in FY2019 on the back of revenue of RM4.8 billion.

Given the excellent result, Top Glove rewarded shareholders with hefty dividend cheques in FY2021, amounting to 65.1 sen per share (comprising 51 sen dividend and 14.1 sen special dividend) for the year — a 450% increase over FY2020’s dividend of 11.83 sen per share. This represented a net profit payout ratio of 68% for FY2021 and 55% for FY2020. For FY2019, the group paid a lower dividend of 2.5 sen per share though its net profit payout ratio was comparable at 53%.

Executive chairman Tan Sri Lim Wee Chai in Top Glove’s 2021 annual report spoke of headwinds in the form of an industry-wide easing of ASPs with customers adopting a wait-and-see approach and deferring restocking activity.

Competition from manufacturers, particularly those from abroad, is also increasingly rife, he said, but noted Top Glove’s strengths and game plan. “While the business environment is expected to be difficult, we are well prepared. The strong cash flow reserves that we have built over the course of FY2021 will enable us to fund continuous expansion and also seize opportunities for accretive M&A (mergers and acquisitions) when they arise. In tandem, we will also continue to invest in R&D (research and development) and leverage advanced technology to reengineer our processes towards a greater degree of product quality, efficiency and innovation,” he comments.

In its latest full-year FY2022 results, Top Glove’s net profit tumbled 97% to RM235.97 million from the supernormal RM7.71 billion in FY2021, with revenue falling 66% to RM5.57 billion from RM16.36 billion previously.

The lacklustre result, it says, was due to the group being unable to pass on escalating costs to customers amid the ongoing oversupply situation.

“To ensure the group is well-positioned to navigate this challenging period, its primary focus is on operational efficiency and cost rationalisation. Towards this end, Top Glove has swiftly responded, establishing mitigating measures that include deferring all capex for new capacity in 2023, in view of lower utilisation levels. It has also embarked on streamlining facilities, focusing on enhancing those producing its in-house supply of materials,” says Top Glove in a statement in conjunction with the release of the group’s fourth quarter results (4QFY2022) on Sept 20.

In addition, Top Glove says it continues to collaborate with its suppliers towards ensuring more cost-effective procurement for a win-win outcome.

Top Glove remains confident that once customers’ stockpiles are depleted and glove restocking activity resumes, the market will stabilise and be better positioned to absorb the additional supply from new capacity.

“As the glove industry is estimated to be running at below 50% utilisation, glove supply is expected to reduce accordingly. The group anticipates that an industry consolidation will follow, further reducing glove supply and paving the way for recovery,” it explains.

At the time of writing, Top Glove’s market value had fallen by two-thirds year to date, as its share price nosedived to 62.5 sen on Oct 11, 2022, from RM2.59 on Dec 31, 2021.

In an Oct 7 report, AmInvestment Bank Research says Top Glove currently trades at FY2024 price-earnings ratio (PER) of 31 times, which is at parity with its FY2018-19 pre-pandemic median.

However, the research house believes Top Glove’s current share price remains fully valued given the ongoing ASP uncertainty and elevated costs remaining unabated over the next three quarters while the group does not offer any FY2023 dividend yield.

Hence, it maintains a “hold” call on Top Glove with an unchanged fair value of 60 sen per share. Will Top Glove give investors a reason to favour it again?