The world’s largest rubber glove manufacturer, Top Glove, had an extraordinary year. It is one of the few companies that benefited from the COVID-19 pandemic as a result of increased demand for rubber gloves.
Its revenue and net profit increased by 50.7% and 380.6% year-on-year respectively in 2020. On a nine-month basis, revenue and net profit even surged by 246.2% and 1,163.1% year-on-year respectively in 2021. Despite its stellar financial performance, some of its management practices in the past year have caught my attention.
1. Share buybacks
The management embarked on a series of share buybacks after the company’s share price started losing steam in September 2020. The share price nosedived from RM9.60 — the highest closing price Top Glove has ever recorded since its IPO — to a 52-week low at RM3.40 in September 2021. This represents a drop of 64.6%. In terms of market capitalisation, about RM50 billion was wiped out from the market over the course of a year.
Between September 2020 and February 2021, the management spent RM1.4 billion to buy back 200.2 million company shares at an average price of RM7.11 per share using internal funds. But, is it worth it? The purpose of share buybacks is to reduce the number of shares outstanding — thereby increasing earnings and dividend per share for existing shareholders – which creates shareholder value.
The rubber glove maker’s five-year median price-to-earnings ratio stands at 29.5. If I use the average annual earnings per share (EPS) over the past three years of RM0.10, the company is valued at RM2.95. The average share buyback price is a whopping 141.0% premium to its intrinsic value. The intrinsic value would be even lower if the more conservative average five-year EPS is used in the calculation. On hindsight, would the management still consider the buyback as ‘a good management recommendation’?
As phrased by The Edge, the share buyback ‘experiment’ was futile. The editor pointed out that Top Glove had failed to support its share price, and signal that its shares were undervalued if that was the intended message to investors. The management did not create value for shareholders by buying back the company shares at such high valuations. The money would have been better distributed to shareholders as a dividend if the management was unsure of how to deploy its capital.
2. Special dividend
The company’s announcement of a special dividend ahead of time is equally puzzling. The special dividend can simply be distributed when the opportune time arrives. This early declaration is not necessary and could be interpreted as a sign to support the share price when it fell below the RM6 threshold in January 2021. Instead, the management should focus on improving the business and ‘let the numbers do the talking’.
3. Labour issues
Despite Top Glove’s claim of ‘doing well by doing good’, its labour practices were in the spotlight. In March 2020, the U.S. Customs and Border Protection discovered that gloves manufactured by two of Top Glove’s subsidiaries were produced using forced labour, and banned the relevant imports into the country. As a result, approximately 8.7 million rubber gloves worth RM5.0 million were seized. After approximately six months of follow-ups and rectifications with the help of an external consultant, the ban was lifted and Top Glove resumed its rubber glove export to the U.S.
On a side note, a whistleblower who worked with Top Glove was fired for sharing photos and concerns about the lack of social distancing at its factories. The firing drew criticism from the public and Top Glove subsequently claimed that whistleblowers will no longer be fired. Managing director Datuk Lee Kim Meow responded during an interview on BFM radio that the whistleblower intended to pass the photos to someone to discredit the company. Lee sounded humble throughout the entire interview and acknowledged the room for improvement in terms of employee relations.
At the same time, Top Glove was charged by the Malaysian government for failing to provide worker accommodation that meets the relevant housing and amenities standards. Top Glove has since embraced the sustainability agenda a bit more. For instance, it spent RM90 million and will spend another RM195 million to improve housing for its workers.
4. Hong Kong listing
Top Glove proposed to do a dual primary listing on the Hong Kong Exchange to diversify its shareholder base and further improve its share liquidity. Initially, the company aimed to raise RM7.7 billion by issuing 1.5 billion shares in February 2021. The plan was temporarily scuttled by the U.S. Customs and Border Protection ban and significantly downsized. Top Glove then intended to raise only RM4.2 billion from 793.5 million new shares in April 2021. The reason given for the change was to safeguard existing shareholders’ interests and minimise dilution to their stakes. The new issuance will represent roughly one-tenth of its enlarged share capital if the listing is completed.
The company’s share price was hammered ever since the plan was announced. Debt sounds like a better option if the company wants to raise money especially in the current low interest rate environment. Its debt-to-equity ratio (including perpetual sukuk) was just 0.2.
Further, Top Glove sits on a huge pile of cash. In its recent Q3 2021 financial results, it had RM4.7 billion in cash and cash equivalents on its balance sheet. The cash should be sufficient for the company’s capital expenditure. Its windfall earnings and profitability also make the listing redundant. Nevertheless, Top Glove is still keen on the listing plan in spite of the lapse of its application.
The fifth perspective
Despite the management issues, Top Glove is a 150-bagger if you invested in its stock since it first listed on Bursa Malaysia and held on till today. It is an admirable feat that deserves acknowledgement. The company’s glove manufacturing capacity has grown by leaps and bounds from 3.2 billion pieces in 2001 to 100 billion pieces in 2021. Top Glove has benefited by being in the right industry at the right time.
However, the fall in Top Glove’s share price since September 2020 is an important reminder that market euphoria never lasts forever. An investor could easily be swayed into buy shares when they are overvalued. So always do your research and make your own call!