A few days ago I posted an article regarding the approximate time frame of having the COVID-19 vaccine rolled out across the globe. You can read the article here. The conclusion, based on the currently available information, is that it is possible that besides the advanced economies and India, the rest of the world might experience a vaccine insufficiency until at least some time in 2022. In fact, the rough calculations show that the currently declared volumes might be sufficient for only approximately 36% of the world (excluding a few overstocked countries), without even taking China into account. Just yesterday (16 December 2020) Reuters published information that according to an internal report by Gavi, the risk of failure of the COVAX initiative is significant, thus the potential exists that people in underdeveloped countries might be left without proper access to COVID vaccines until 2024. You can read the full article here. In other words, an end to COVID by the end of 2021 is at present highly unlikely.

This macroeconomic factor aside, let's look at the actual earnings potential of the company in review - Top Glove. Information on the topic is scattered all over the place and the situation is unfolding very dynamically, so it might be a tedious task to get an accurate perspective of what exacty is going on at present, let alone months or years in the future. Thus, we will do the best we can with the currently available information and with the currently visible economic horizon.

Average Selling Price (ASP)

The bulk of Top Glove's revenue comes from sales of gloves. For the sake of our analysis we will assume that the rest of their business (manufacturing and sales of condoms, face masks, dental dams, exercise bands, and household products) contributes a negligible part of the company's revenue, so we will ignore it.

The gloves business generates revenue from 4 main sub-segments - nitrile (NBR) gloves, natural rubber latex gloves, vinyl gloves (usually grouped together with the CPE and TPE segments), and surgical gloves. From information shared by the company, we know how much each segment contributes to the company's total revenue, and what part of the production capacity corresponds to each segment. The numbers are given in the table below. The calculations are done based on 85% utilization rate for 1QFY2021.

As the contribution of the vinyl and surgical segments to the overall revenue is rather low as compared to the nitrile and latex segments, we will focus our analysis predominantly on the latter two segments. According to the calculations based on currently available information, the ASP for nitrile gloves was on average RM297 per 1,000 pieces throughout the period September-November 2020. For latex gloves the corresponding figure was RM207 per 1,000 pieces. Assuming average exchange rate of 1 USD = 4.10 MYR throughout the period, that converts to US$72.50 and US$50.50 respectively. It is important to note that this is the average price, which includes standard delivery orders, and spot orders. We know that as of September the price of regular orders for nitrile gloves was US$70, and for spot orders it was US$100. Assuming the same ratio of prices throughout this and the previous period, and assuming that the announced 30% allowance for spot orders has been observed throughout the period, we can calculate that the ASP for regular orders of nitrile gloves was actually RM263 (US$64) and the ASP for spot orders was RM375 (US$91.50). In other words, the ASPs per the company's quarterly reports were approximately 10% lower than the ASPs announced in September (in the beginning of the quarter). The difference of about 10% between the book values and the announced ASPs can be explained with the future deliveries. In other words, the ASPs reflected in the revenue in the 1QFY2021 report are derived from orders that were placed in 4QFY2020, or even in 3QFY2020.

Delivery Times

The announced delivery times appear to have normalized slightly since their peak in September. Below is a table with the announced delivery times (in days) as well as the corresponding expected delivery dates, based on various sources:

This means that orders, in particular for the highest profit margin - nitrile gloves, are currently locked in until May 2022. That would be the end of 3QFY2022 for Top Glove. We add to that the fact that currently, due to the large lead times for delivery, the actual sales revenues seem to appear on the company's books one or two quarters after the orders get placed, and the assumption that this is going to continue to be the case until eventually order deliveries normalize, we can expect that "COVID" level revenues could be reported up to the end of FY2022 (or 7 quarters into the future).

Contract Liabilities

An item on the company's books that likely doesn't receive the deserved attention, especially at this time, is the Contract Liabilities under the Current Liabilities category in the company's financial statement. In fact, the only time I have seen it mentioned was in this article by The Edge with questions the newspaper had sent to Top Glove. The answer given was: "These are the deposits collected for customers for future orders." With this in mind, here is the explanation given in the company's annual report:

"A contract liability is recognised if a payment is received or a payment is due (whichever is earlier) from a customer before the Group transfers the related goods or services. Contract liabilities are recognised as revenue when the Group performs under the contract (i.e., transfers control of the related goods or services to the customer)."

In other words, the contract liabilities item may be a good predictor of the company's future revenues. I didn't find any information on the company's deposit collection policy. Thus, I made some calculations based on the past two years' figures:

This means that it might be safe to assume that Top Glove collects 5% deposit for future deliveries. As of 30 November 2020, the contract liabilities of the company stand at 1,089,404,000. If the assumption is correct, this means that the company may be looking at delivering goods worth RM21.79 billion. This is assumed to be for all outstanding orders, including orders that flow into FY2022. This is locked-in revenue, i.e. it excludes any additional orders that get placed throughout the period, and in particular it excludes spot orders, except for spot orders with very near delivery. 

The only segment whose current outstanding orders flow into FY2022 is the nitrile glove segment. Let's assume that 60% of the revenue throughout the period is derived from the nitrile gloves segment (currently 56%, projected to increase). Let's also assume that this revenue is evenly distributed throughout the remaining 6 quarters (2QFY2021 to 3QFY2022). That means an allowance of RM6.54 billion for the 3 quarters of FY2022. Thus, the current locked-in revenue for the remainder of FY2021 is assumed to be RM15.25 billion, or RM5.08 billion per quarter on average.

At present, according to Top Glove the delivery time for spot orders is 3 months. Thus, we can assume that the spot orders for the next quarter are included in the RM15.25 billion locked-in revenue. We make two assumptions:

- The quantity reserved for spot orders for 2QFY2021 is 30% of the total manufactured quantity;

- Spot orders are priced 30% higher than standard delivery orders. 

If we assume even distribution of the revenue for each of the three remaining quarters, that would mean that the spot order revenue for 2QFY2021 would be RM2.18 billion. We deduct it from the current total locked-in revenue of RM15.25 billion.

We now assume that spot orders will drop to an average of 25% of the total quantity of orders (lower than projected). Thus, RM4.67 billion in revenue the company could derive from spot orders. In other words, the revenue for the remaining 3 quarters of FY2021 may reach RM19.92 billion, for a whole financial year 2021 revenue of RM24.68 billion.

Important disclaimer: Any views expressed are for informational and discussion purposes only. None of this information is intended as, and must not be understood as, a source of advice. It is imperative that you always do your own research and that you make any decisions based on your personal situation and your own personal understanding.