Topglove announced its results for 1Q2010 ended 30/11/2009. Its net profit increased by 14.7% q-o-q or 90.9% y-o-y to RM65.2 million while turnover increased by 10.5% q-o-q or 22.3% y-o-y to RM472 million. The company attributed to its strong profit growth to t adapting the challenging business environment through cost-saving measures, improved productivity & product quality, and aggressive marketing strategies to maintain its position as a market leader.
Table: Topglove's 8 quarterly results
Chart 1: Topglove's last 14 quarterly results
Industry Outlook & Concerns
Due to the spread of the H1N1 flu, the demand for rubber glove has surpassed the existing output. To cope with the demand, every player in this industry has been increasing its capacity. More new capacity is currently being planned. There is a danger that the continuous expansion may result in a state of overcapacity. We have seen how this had badly affected the players in the fibreboard & MDF industry in 2008.
Under the current state of imbalance, producers enjoy increased profit margin. Once the state of equilibrium is reached, growth in profit margin will cease. However, a state of overcapacity will result in competition & a decline in profit margin. This is especially so as the increased raw material costs such as rubber latexx will have to absorb by the producers. See Chart 2 below.
Chart 2: Rubber latexx's weekly chart as at Dec 17, 2009 (Source: Malaysian Rubber Exchange)
Valuation
Based on its last 4 quarters' EPS of 68 sen & its closing price of RM9.62 on Dec 17, Topglove is now trading at a PE of 14 times. With its track record of strong growth, one can justify Topglove's relatively high PE multiple. However, one can also argue that the strong growth in top-line & bottom-line in the past one year was due to very favorable conditions (imbalance in demand & supply as well as the onset of the H1N1 flu). If either one of both of these conditions were to change, the financial performance will be affected. As such, I believe the upside for Topglove will be limited going forward.
Technical Outlook
Topglove is approaching its December 2006 high of RM10.00 soon. This level could pose a strong resistance to the stock.
Chart 3: Topglove's weekly chart as at Dec 21, 2009_3.30pm (Source: Quickcharts)
Conclusion
Despite the strong results, I think that it is time for some profit-taking for Topglove. This is especially so as the stock approaches the strong technical resistance posed by its all-time high of RM10.00.
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