Top Glove Corporation Berhad (SGX: BVA) has been one of the shining lights in the stock market this year. While Singapore’s broader market declined this year, Top Glove’s shares have posted an impressive 40% gain. Market participants have been won over by Top Glove’s record-breaking sales revenue and all-time high profit before tax for the full year ended 31 August 2018 (FY2018). It also managed to increase its sales volume by a solid 26% compared to last year.
With that in mind, shareholders might want to know if Top Glove can continue its stellar track record of growth going on to the next financial year.
Here are some things to consider.
What can drive growth?
Despite its impressive year, Top Glove is certainly not resting on its laurels. The group has ambitious targets of achieving a Fortune Global 500 status by 2040. It is, therefore, not surprising to see it continuously looking for ways to expand and grow its business.
It is in the midst of completing the expansion of several of its production facilities that are scheduled to be completed between 2019 and 2020. In total, these new facilities will boost annual production capacity by 98 production lines and 9.8 billion gloves per annum.
The new production facilities will represent a 16.5% increase to its current annual glove production capacity.
Moreover, with robust demand for healthcare gloves, Top Glove will most likely have little problem finding customers for its increased production volume.
Limitations to its growth plans
Besides pursuing its own production capacity expansion, Top Glove is also open to the idea of acquisitions and mergers to grow sales. In FY2018, Top Glove acquired Aspion Sdn Bhd and Duramedical Sdn Bhd. The two acquisitions helped to drive sales growth during the year and were major contributors to the improved operating performances.
However, going forward, Top Glove may have limited financial flexibility to pursue major acquisitions. The group forked out a significant amount to pursue internal growth through the expansion of its facilities. The high capital expense resulted in negative free cash flow during the financial year.
In addition, it is also highly geared with a net debt of around RM2 billion. It had a debt to equity ratio (a measure of debt) of 91%, which is high in my view. Its stretched financial position may limit Top Glove’s inorganic growth prospects in the coming years.
Raw material prices
Finally, investors should also be aware that part of the reason for the growth in net profit is the decrease in the price of natural rubber latex, a major raw material in rubber glove production. Natural rubber latex price was down 21.7% compared to FY2017.
Consequently, gross profit margin improved from 17.8% in FY2017 to 20.1% in FY2018.
Raw material prices are one of the major factors that can influence profit and margins in the highly competitive glove manufacturing industry. It is also, unfortunately, out of the control of companies that operate in the industry. If raw material prices rise next year, in comparison to 2018, it could reverse the gross profit margin expansion achieved in FY2018.
The Foolish bottom line
Top Glove had a stellar FY2018. It reported strong growth in both its top and bottom line. In addition, the group is also actively planting seeds for growth by increasing its production capacity to meet the growing demands.
That said, investors should know that it is unlikely that the company can supplement its internal growth with acquisitions in the near future. Raw material prices also moved in its favour in FY2018 and due to the volatile nature of raw material prices, investors should not count on lower prices continuing to boost margins on a consistent basis.
All things considered, I am expecting Top Glove’s revenue and sales volume to grow in the future but with the above mentioned uncertainties, it would be hard-pressed to maintain the exhilarating pace of growth the company experienced in FY2018.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore has recommended shares of Top Glove. Motley Fool Singapore writer Jeremy Chia does not own any of the shares mentioned.