2 June 2020
Due to Covid 19 pandemic the demand for medical gloves far exceeded supply. As a result, glove price has been going up higher and higher and all glove manufacturers are making more and more profit which are being reflected on their share prices.
As you can see all the glove makers’ share prices have gone up more than 400% within 6 weeks. No stock can go up or drop continuously for whatever reasons. After sometime it will change its moving trend. In the case of glove share, all of them are dropping today which is a healthy sign.
Another reason for the price correction is that a few investment banks have started price capping for glove shares for safety of the bank and also their clients who are using margin finance. For example, RHB capped 35% for all glove shares and the clients are given 30 days to regularise their margin accounts.
A few days ago, I posted my article about RHB’s real intention for its downgraded Comfort from buy to neutral. I criticised its real intention. Today RHB published a buy recommendation for Supermax with Rm 10.50 as its target price. RHB might have bought enough of Supermax and are buying Comfort.
All investment banks have many different kinds of shares in their portfolios. Almost all their holdings are being dampened by the Covid 19 pandemic and their have to sell to cut loss. Currently, they are all cash rich and they are buying glove shares aggressively. That is why the daily traded volumes are unprecedented. The average daily traded volume for Comfort is more that 80 million shares. Very often the volume exceeds 100 million shares. Only investment banks have so much money to buy so aggressively.
My old friend Mr Ooi Teik Bee is a very reliable and famous fund manager. He circulates his weekly share analysis report to his 1,000 subscribers. His yearly subscription fee is Rm 1,000. If you are interested you can contact him 01112813880 or email: tbooifx@gmail.com.
He has given his permission for me to excerpt his calculation for Comfort, Supermax and Top Glove as follows:
Comfort
Comfort produces 5.4*1.12 = 6.048 Billion rubber gloves a year. 85% is Nitrile gloves, 15% is Latex gloves. Comfort produces 5.14 billion Nitrile gloves a year (85%)
Assume the selling price of Nitrile glove at USD 0.03 per piece or RM 0.126
Total revenue of Nitrile gloves = 5.14 billion*RM 0.126 = 647.64 million
Comfort produces 907.20 million Latex gloves a year (15%)
Assume the selling price of latex glove at USD 0.02 per piece or RM 0.084
Total revenue of latex gloves = 907.20 million*RM 0.084 = 76.20 million
Grand total revenue = 647.64+76.20 =723.84 million
At 30% margin, PBT = 217.15 million
Assume 20% tax, PAT = 173.72 million
NOS = 583 million
EPS = 173.72/583 = 0.30
If PER = 20, the target price = 5.96.
If PER = 26, the target price = 7.75.
Supermx
Supermx produces 26 billion rubber
gloves a year. 63% is Nitrile gloves, the balance 37% is latex or other
gloves. Supermx produces 16.38 billion Nitrile gloves a year (63%)
Assume the selling price of Nitrile glove at USD 0.03 per piece or RM 0.126
Total revenue = 16.38 billion*RM 0.126 = 2.063 billion.
Supermx produces 9.62 billion Latex gloves a year (37%).
Assume the selling price of latex glove at USD 0.02 per piece or RM 0.084
Total revenue = 906.75 million*RM 0.084 = 808.08 million
Grand total revenue = 2.063 billion + 808.08 million = 2.871.96 billion
At 30% margin, PBT = 861.59 million
Assume 20% tax, PAT = 689.27 million
NOS = 1,360 million
EPS = 689.27/1360 = 0.51
If PER = 20, the target price = 10.14.
If PER = 26, the target price = 13.18.
Topglov
Both Maybank and Macquarie give a target price of RM 20.00 for Topglov for FY 2021. Topglov listed in SGX closed at SGD 6.35 today. Assuming 1 SGD = RM 3.07, Topglov listed in SGX closed at RM 19.50 today.
I believe the target price of Topglov listed in KLSE at RM 20.00 is achievable. The reasons I revised up the target price
- The price increase example is obtained from Supermx's analyst briefing note.
- Before COVID-19, the price of gloves was USD 90, and the selling price of OEM was about USD 25.
- The profit margin of the manufacturer is about 9%-13%.
- Today, the price of gloves has reached USD 150, of which the manufacturer's Selling Price increased to USD 110.
- The distributor's Mark-Up Price has decreased.
- The Manufacturer's selling price of gloves had increased from USD 25 to USD 110, an increase of 340%.
My recommendation
- I set the target price of Comfort ranging from 5.96 to 8.95. The minimum target price is at 5.96.
- If you buy Comfort at 4.20, the potential gain is 42%.
- I set the target price of Supermx ranging from 10.14 to 13.18. The minimum target price is at 10.14.
- If you buy Supermx at 7.95, the potential gain is 28%.
- I set the target price of Topglov at 20.00.
- If you buy Topglov at 15.54, the potential gain is 29%.
