Trying to Make Sense Bursa Investments
Top Glove - Serious, Material Inconsistencies with AmInvest's Report
This morning a rather curious analyst report came from AmInvest. I've been meaning to comment on AmInvest's glove sector valuations for a while, but I didn't get the chance up to now. You can download the actual report from here.
In a nutshell, AmInvest give a "Neutral" call on the glove sector (specifically on Top Glove, Hartalega, and Kossan), meaning that the counters currently trade at around fair value. I will focus on Top Glove as the visibility for them generally appears the clearest as compared to the other two glove counters covered in the report. I will not comment on the assumptions AmInvest mention in their report, which are always a matter of opinion. Let's look at their actual numerical inputs, specifically the ones for FY21 as the further in the future we look, the blurrier the visibility is. Based on these numerical inputs, AmInvest derive a fair value of RM6.50 for Top Glove.
For FY21, they set revenue at RM25.6 billion. Note that this is almost perfectly in line with my own estimate of RM24.7 billion - you can read how I come to this figure here. However, they set net profit at RM7.9 billion and this is where all the curious things in the world come to play.
First, if the net profit comes to RM7.9 billion for the year, this would mean that Q1 PAT of RM2.38 billion, widely regarded (including by AmInvest, according to their analysis) as the weakest quarter for this year, would represent 30% (!!!) of the net profit for the entire year. If, as they say their assumption is, ASPs continue to rise for the 1H21 (I assume they mean 1HCY21), this would mean that Q2 and Q3 should see higher net profits recorded than Q1. Then, following AmInvest's logic but without them explicitly saying this, Q4 would need to record either 0 (zero) PAT, or more in line with the numbers they present to us - negative profits (i.e. losses). Note that Q4 for Top Glove ends in August.
Did AmInvest forget to include one full quarter in their profits estimate?
Second, the consensus PAT across all analysts for FY21 is approximately RM10.5 billion. This is based on consensus revenue of RM20.5 billion, i.e. net profit is estimated at 51% of revenue for the year. Note that in the post I linked to above, I derive the figures for revenue, but not for PAT, because a lot more assumptions need to be made to come to an estimated net profit figure. Thus, in this case the consensus PAT might be a good guide. Pay close attemption to this - AmInvest's revenue estimate is significantly higher than the consensus revenue estimate. However, their PAT estimate is significantly lower. There is no explanation as to why that is the case. In fact, they say exactly the opposite in their report when talking about rising raw material costs: " we believe glove makers will be able to pass on the price increase to buyers, thus keeping their margins safe." If the profit margins remain the same, then Q1 profits may be a good indicator for profits throughout this financial year (ending in August 2021). Coincidentally, net profits for Q1 (RM2.38 billion) are equal to 50% of revenue (RM4.76 billion).
Did AmInvest contradict their own assumptions or did they input wrong numbers?
To top all of this, the cherry on the cake is in the actual hold "call" summary:
"We forecast Top Glove’s net profit at RM2.9bil, RM2.7bil and RM1.5bil for FY21–23F..."
I will just leave this here without any additional commentary.
Minor Update
AmInvest updated their report, and edited the "net profit" part of their rationale to "RM7.9bil" for FY21. However, no additional explanation was provided on the rest of the glaring inconsistencies. You can see the updated report here.
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.
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Discussions
7 people like this. Showing 28 of 28 comments
supersaiyan3, thank you for your comment.
This is actually one of the lowest quality analyst reports I have read. There are many problems with it beyond the seemingly random figures for profits they have given, including utilisation rates, exchange rate assumptions, and (what appear to be) ever-rising raw material prices until 2023! Really poor work.
2021-01-13 11:08
wkc5657, I would have hoped so, but this is not the case. The same report, with the same inputs, was released in December.
2021-01-13 11:10
SteadyT, thank you for your comment.
I don't want to call out names (although the name is given in the report). I can only say that this analyst is not a newbie. I have seen reports of his dating back a few years.
2021-01-13 11:44
GLNT, thank you for your comment.
I will not argue on the definition of "newbie", but in my humble opinion someone with a few years of experience should not be allowed to make this amount of mistakes (if they were indeed mistakes).
2021-01-13 14:03
Ben, thank you for your effort to elaborate in detail.
I makes one wonder whether it is a genuine mistake or with malicious intention as the discrepancies are so so glaring !
2021-01-13 14:29
BALANCE_VIEW and gongkia, thank you for your comments.
Unfortunately, it is impossible to know if it was done intentionally. Let's hope that as wkc5657 mentioned above, it might have been an oversight on the supervisor's side to approve the report for publication.
2021-01-13 14:44
LaoTzeAhSir and GillianTan78, thank you for your comments.
GillianTan78, I assume your comment is related to my other article from today: https://klse.i3investor.com/blogs/bursainvestments/2021-01-13-story-h1539320832-Who_Is_the_Mysterious_Gloves_Short_Seller.jsp
I didn't want to comment on the actual notes from the report, because I hadn't seen the actual report. However, it does seem like JP Morgan have done their best to selectively present only bits and pieces of information that fit their narrative.
2021-01-13 18:19
Ben, it looks like AM Invest issued a revised edition of the report correcting the RM2.9 billion error for Top Glove.
https://klse.i3investor.com/blogs/AmInvestResearch/2021-01-13-story-h1539321796-Glove_Earnings_will_peak_in_1H2021.jsp
Funnily the updated report makes no mention of that error.
2021-01-13 19:25
sikusiku and Up_again, thank you for your comments.
sikusiku, I updated the article earlier to reflect that change. However, the change is minimal and doesn't explain the rest of the inconsistencies.
2021-01-13 19:35
Ben Tan , you ate right . Q1 2021 margin is already 50 %. With incressing ASP in Q2 and Q3 , the net margin should be higher than 50%. If the estimated revenue for 2021 is rm.25.6 billion , its net profit should be at least 12.8 billion assuming net margin of 50 %. Its prediction of 7.9 billion net profit is way off.
2021-01-13 20:51
Although I'm not a fan of gloves right now, if TG really failed to deliver >10b this year, I think the shares will tank.
>10b should be easy for TG unless vaccination reached 50% around the world by June.
The real challenge should be 2022 forward with the massive over capacity around the world.
2021-01-14 08:34
pjseow and Andre Kua, thank you for your comments.
pjseow, that is indeed the case, and that is what appears to be significantly off with the report of AmInvest. There is no explanation or justification as to why the profit margin is given at 30% instead of 50%. On the contrary, according to the report the profit margins are not expected to suffer (at least for this year).
Andre Kua, supply is expected to be running behind demand at least until year-end 2023, according to reports by Margma. Of course beyond that point there is little visibility. However, setting up of a glove manufacturing facility with a working production chain is a major undertaking, which has proven over the years to not be achievable for everyone. New entrants have significant disadvantages to established players.
Revenue for FY22 (ending August 2022 for Top Glove) is mostly locked in with delivery times stretching 560 days from now for nitrile gloves (the highest revenue segment).
2021-01-14 09:04
dusti, thank you for your comment, but your logic escapes me. In order for me to know that the report is flawed, I would need to first read it.
2021-01-14 10:34
Ben , you know the author, intended assignment, 3 quarters year, entertaining comments most with spent arguments [only Gillian’s comments is relevant to me]. I hope you are not trying to save a flawed report. Really i would ask the author to remove the report, pronto!
Cheers stay safe and HAPPY
2021-01-14 11:05
dusti, thank you once again for your comment. I understand what you mean now. Unfortunately, the report has not been withdrawn, and I doubt it will be withdrawn. Hope is it will get edited soon.
2021-01-14 11:07
The bigger scam is , shud be by nominated SO CALL 'vaccine developers '
who knows its just glucose liquid in that small cylinders to ask huge block of monies from every countries.
All that monies flushed by G... at their rakyat s expenses.
Anal-ytic article its just the tip of the iceberg lah !
2021-01-14 22:27
Complain d bugger n IB to BURSA n SC for absent of duty of care n professionalism n maybe even something more sinister
2021-01-15 09:24
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supersaiyan3
You are absolutely right, looking at their working can expose how they try to avoid giving high target price.
2021-01-13 10:44