Top Glove’s Shares Rose 5% This Morning: What’s Behind the Euphoria?

Founded in 1991, Top Glove (SGX: BVA) is today the world’s largest rubber glove manufacturer. Its gloves are used in the medical, food, and general industrial sectors. The company, which has a primary listing on Malaysia’s stock market, Bursa Malaysia, was dual-listed here in Singapore in June 2016.

As of the time of writing (12:05 pm), Top Glove’s shares are at S$2.01 each, up 5% compared to Friday’s close of S$1.915. What could be the reason(s) behind this?

One probable cause could be that the company delivered solid top-line growth for its fiscal year ended 31 August 2017 (FY2017). Last Friday, Top Glove released its earnings results for FY2017. Revenue grew to a record-high of RM3.4 billion, up 18% from FY2016.

Top Glove’s sales volume grew 7% while average selling prices (ASPs) rose due to a surge in raw material prices and a strengthening of the US dollar over the course of its financial year. During the year, Top Glove also increased its production capacity and managed to grow sales of nitrile gloves, which command a higher ASP. These factors helped propel the company’s revenue higher.

However, net profit declined by 7.7% to RM332.7 million, mainly due to higher operating expenses and finance costs, and a drop in the share of results from associates. Consequently, the net profit margin for FY2017 was at 9.8%, a decline from FY2016’s 12.5%. Diluted earnings per share came in at 26.52 sen in FY2017, down from FY2016’s 28.78 sen.

As of 31 August 2017, Top Glove had a net debt position of RM136.3 million, an improvement from the net debt position of RM175.3 million seen one year ago.

The company’s return on equity slipped from 19.8% in FY2016 to 16.6% in FY2017.

Top Glove brought in a negative free cash flow of RM64.5 million as compared to a positive free cash flow of RM199.6 million in FY2016.

Shareholders would be receiving a final dividend of 8.5 sen, bringing the total FY2017 dividend to 14.5 sen, unchanged from FY2016. FY2017’s total dividend translates to a payout ratio of 54.6%.

Top Glove is currently constructing two new manufacturing facilities, which will be operational by December 2018. Upon completion, the company’s production capacity will increase by 7.8 billion gloves per year.

By the end of 2018, Top Glove is projected to have 31 glove factories, 628 production lines and a total annual production capacity of 59.7 billion gloves. The company has also commenced preparations for its condom manufacturing facility, which is expected to start running next year.

On top of implementing “smart factories”, the company is also looking into inorganic expansion and new set-ups in related industries to grow faster and more efficiently.

At the stock price of S$2.01, Top Glove has a price-to-earnings ratio of 23.6 and a dividend yield of 2.3%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.