With an abundance of rubber plantations in Malaysia, Thailand and Indonesia, it is unsurprising that many of the largest rubber glove manufacturers hail from this region. This gives them a significant cost advantage over other manufacturers world wide. Moreover, global demand for both healthcare and clean room gloves has been steadily growing each year. This has lead to strong performances by rubber glove manufacturers in the region over the past few years. With that in mind, I have decided to compare two prominent glove manufacturers from Malaysia to see which makes the better investment now. The two companies in focus…
With an abundance of rubber plantations in Malaysia, Thailand and Indonesia, it is unsurprising that many of the largest rubber glove manufacturers hail from this region. This gives them a significant cost advantage over other manufacturers world wide. Moreover, global demand for both healthcare and clean room gloves has been steadily growing each year. This has lead to strong performances by rubber glove manufacturers in the region over the past few years.
With that in mind, I have decided to compare two prominent glove manufacturers from Malaysia to see which makes the better investment now. The two companies in focus are Top Glove Corporation Bhd (SGX: BVA) and Riverstone Holdings Limited (SGX:AP4). As a quick introduction, Top Glove is the largest glove manufacturer in the world, supplying around 25% of the global supply. Riverstone, on the other hand, is one of the smaller players in the market but because of its expertise in cleanroom gloves, it has managed to eek out higher profit margins than its competitor.
In an earlier article, I compared the financial aspects between the pair. From that exercise, I concluded that Riverstone came out tops in revenue and profit growth over the past five-year period. In this article, I will compare the valuations of both stocks to see which, at current prices, can pose better value for investors.
Perhaps the best gauge to compare stocks within the glove-manufacturing sector is the price-to-earnings ratio. This is a comparison between the share price to its earnings per share. Mathematically, it can be calculated by simply dividing the earnings per share by the share price. The lower the price-to-earnings ratio is, the cheaper the stock.
At the time of writing, shares of Top Glove exchanged hands at S$3.41 apiece. It has an annualised earnings per share of 34.2 sen per share. At current exchange rates, that equates to a price-to-earnings ratio of 28.4 times.
At the other corner, shares of Riverstone Holdings currently trade at S$1 per share. Based on its annualised earnings per share of 16.8 sen, it had a price-to-earnings ratio of 17.5 times.
In this respect, Riverstone trades at a slight discount to Top Glove.
The price-to-earnings growth ratio is a common metric used by investing legend Peter Lynch to determine if the share price is cheap or expensive based on both its growth and current price-to-earnings ratio. As it takes into account the company’s growth prospects, I think it is a better gauge of the company’s valuation than simply using the price-to-earnings ratio.
To compare between the pair, I will use growth over the most recent three-year period to estimate future growth of the company.
Over the last there-year period, Top Glove has grown its earnings per share from 29 sen in FY2016 to annualised earnings per share of 34.2 sen in FY2018. That translates to a compounded growth of 5.65%. Based on its price-to-earnings ratio and historical earnings growth of 5.65%, it had a price-to-earnings-growth ratio of 5.0 times.
On the other hand, over the same time frame, Riverstone has grown its earning per share from 16.2 sen to an annualised earnings per share of 16.8 sen in FY2018. This equates to a compounded annual growth of just 1.22% over the three-year period. Consequently, it has a price-to-earnings-growth ratio of 14.3 times.
Top Glove is therefore cheaper based on more recent growth rates.
The Foolish bottom line
In the first part of this series, I concluded that Riverstone achieved a better rate of growth over the past five years. That said, in more recent history, Riverstone’s growth has somewhat stagnated or even reversed due to the challenges it faces in raw material pricing and foreign exchange fluctuations. Top Glove’s growth, on the other hand has accelerated over the past two years, and has grown at a faster pace than Riverstone in more recent history.
Together with a lower historical price-to-earnings growth ratio, I have to declare that despite Riverstone’s five-year growth outpacing its competitor, Top Glove still comes up top as the better buy in my opinion.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Riverstone Holdings Limited and Top Glove Corporation Berhad. Motley Fool Singapore contributor, Jeremy Chia, owns shares in Riverstone Holdings Limited.