3 reasons to fall in (g)love with this stock

On September 23, the Singapore Government’s Multi-Ministry Task Force indicated that we might soon be entering Phase 3 of the reopening of the economy.

As we leave old habits behind and enter a “new normal”, new investing opportunities also emerge.

Industries that are essential in keeping economies running have thrived, rewarding shareholders in those companies handsomely.

Top Glove Corporation Berhad, or Top Glove, the world’s largest maker of rubber gloves, is one such beneficiary.

Based in Malaysia, the company has 46 factories and distributes to 195 countries through its six global distribution hubs.

In 2020, the company has already seen its share price balloon from $0.52 in January this year to $2.84 by September, for a return of 457 per cent.

But the Malaysia-based manufacturer’s growth may just be getting started.

Here are three reasons why Top Glove could go on to shatter new highs and further endear itself to investors.

Robust glove demand

Demand for rubber gloves has soared on the back of the pandemic.

As hygiene standards and healthcare awareness increase sharply worldwide, so has the use of gloves, especially in non-medical sectors.

According to the Rubber Gloves Manufacturing Association in Malaysia, global demand for rubber gloves is expected to grow by 20 per cent annually from 2019 to 2022, reaching 486 billion pieces.

Going forward, glove demand is still projected to be strong post Covid-19, at 15 per cent per annum.

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The expected growth rate is up from the 10 per cent annual growth rate prior to the pandemic.

As the market leader in rubber gloves, Top Glove has benefited tremendously.

According to Top Glove’s Executive Chairman Lim Wee Chai, demand is so strong that the company’s current lead time is at a whopping 600 days, up from an average of around 30 to 40 days pre-pandemic.

Top Glove is well-poised to capture the gains from this soaring demand.

The glove manufacturer has earmarked RM10 billion (S$3 billion) for capital expenditures over the next 5 years to expand manufacturing capacity as well as for technological upgrades.

The outlay will raise Top Glove’s total glove production capacity by 41.5 per cent by 2022, and more than double its current capacity by 2025.

A long history of growth

Top Glove posted sterling results for the full financial year ended 31 August 2020, turnover hit a record-high of RM7.2 billion, an impressive 51 per cent increase year-on-year.

But don’t be too quick to attribute the growth solely to the pandemic.

Between 2014 and 2019, Top Glove more than doubled its annual revenue, posting a steady revenue growth rate of 16.1 per cent per year.

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The 2018 acquisition of Aspion, one of the major manufacturers of surgical gloves, contributed profit before tax of RM139.9 million for the year ended 31 August 2020.

Additionally, the company has also looked to diversify its product offerings beyond gloves, entering the condom manufacturing business in 2018.

In a September press release, the company indicated that it would be looking to expand further through mergers and acquisitions, in addition to organic growth from their core business.

While it is undeniable that Covid-19 has brought about a strong tailwind for Top Glove, it should be evident that the company was already displaying signs of consistent growth even before the crisis hit.

In fact, the pandemic has allowed Top Glove to build a strong balance sheet that should help the company accelerate its plans for growth.

As of 31 August 2020, the company boasted net cash reserves of RM2.3 billion, largely due to the phenomenal performance in the prior year.

Sustainable and growing dividends

As a cherry on top, Top Glove also boasts a stable and growing dividend.

Between FY2011 and FY2019, dividends grew at around 13 per cent a year, rising from RM0.93 to RM2.50. In light of the marvellous 2020 results, dividends more than quadrupled to RM11.83.

Despite the huge jump in dividends, the company’s dividend payout ratio, which is the proportion of earnings that a company pays out as dividends, was kept at 51 per cent, a level that has been relatively stable since 2012.

This move shows Top Glove’s commitment to paying shareholders a share of its profits.

Coupled with the company’s strong growth prospects, it seems likely that shareholders will enjoy both capital gains as well as an increasing dividend over the long-term.

This article was first published in The Smart Investor. Disclosure: Herman Ng does not own shares in any of the companies mentioned.