Trying to Make Sense Bursa Investments
Top Glove: Stellar Quarter Leads Some Analysts to Cut Price Targets
Yesterday Top Glove published its 2QFY21 financial results. Without going into details, as these have already been discussed in-depth elsewhere, the net profit came at RM2.87 billion which was within my expectations but categorically above the consensus expectations of analysts. Below is how the maths works:
1) Why the figure would've been within the expectations of anyone who had paid any attention:
- The company registered net profit of RM2.37 billion in Q1.
- The company released guidance (multiple times) that blended ASP would be 30% higher for this quarter. This could potentially translate to RM3.08 billion in net profit at constant profit margin.
- Part of the company's factories were closed in early December, resulting in estimated 4% drop in earnings for the financial year according to the company. Since this drop is attributed to earnings in Q1 and Q2 only, it would mean a drop of appx. 6-10% in expected earnings for Q2.
Thus, expected profit for this quarter should have been in the range of RM2.77 billion and RM2.89 billion,or average of RM2.83 billion - within 1.4% from the actual declared net profit.
2) How the figure compares to the analysts' consensus estimate:
According to The Edge, the consensus net profit for the financial year is RM10.16 billion (source). This means that the expectation is for RM2.59 billion PAT for the (then) upcoming 3 quarters on average. That's on average 10% lower than the net profit achieved for this quarter, and remember - this is a quarter which with other things equal saw earnings down 8% from expectations due to factory closures. Should earnings have been normal, analysts would have been about 16% off the mark (downwards) on average - not a great achievement by any means, especially having in mind that only 4 analysts have given estimates meaningfully higher than the consensus - UOB, Maybank, TA, and DZT.
However, according to today's analyst reports, the results have come within their expectations. They cite the full 1HFY21 earnings results (RM5.24 billion), and divide their own estimates by half. At the same time, most (all?) concede that their estimates are based on the assumption that blended ASPs will be on the rise - from Q1 to Q2, and onwards towards the second half of the financial year. Thus, dividing their estimate by half doesn't make sense in this situation. Additionally, as mentioned above these results came at disturbed manufacturing process due to factory closures. Overall, all of this signifies that analyst estimates have been decidedly off the mark.
Albeit their estimates being off downwards by a meaningful margin, some analysts have started cutting their price targets, while maintaining their previous calls (except for Maybank, which has downgraded the company to HOLD).
Below are some interesting excerpts from some of the reports, justifying the price target cuts, plus corresponding commentary on my part.
Affin Hwang (TP: RM6.65, BUY; down from RM10.10)
"We are raising our EPS forecast for FY21 by 3.2% to factor in the new ASP assumptions, but maintain our profit forecasts for FY22/23. Despite the decent performance, we are lowering our TP to RM6.65 based on 15x CY22E PER (from 22.7x previously) which is at -1SD of its historical average to factor in the potential dilution from the new equity raising proposal."
The re-rated price target is approximately 35% lower than their previous price target, even without factoring in the raise in their EPS forecast for FY21. The justification that this is based on dilution from the Hong Kong listing is insufficient and unsatisfactory since that listing will result in a maximum expansion of the share base by 15% only.
AmInvest (TP: RM5.46, HOLD; down from RM5.63)
"Our FV downgrade incorporates an ESG-adjusted discount of 3% for our rating of 2 stars (Exhibit 4)."
"Top Glove’s 1HFY21 core net profit of RM5.26bil came in above our expectations at 66% while meeting the street’s expectations at 52%. We increase our FY21 forecast by 7% to RM8.54bil and raise its utilisation rate to 73% while maintaining our average selling price (ASP) assumption at US$80/1,000 pcs. We maintain our forecasts for FY22–23."
In total, the financial house has increased its FY21 earnings forecast. However, the price target cut is justified with an "ESG-adjusted discount." Note that the previous report of this analyst house was released on 1 March (10 days ago), and to anyone's knowledge there have been no new ESG concerns in regards with Top Glove in the interim. On the contrary, the company received Prime Minister's Hibiscus Award for "Notable Achievement in Environmental Performance" just a few days ago (source). Thus, neither the new ESG discount makes logical sense at this time, nor the net profit adjustment upwards has been taken into account in the re-rating. Additionally, note that even with this adjustment upwards of their net profit estimate, it is still significantly below the consensus at RM8.536 billion for FY21. This means that AmInvest expect the next two quarters of FY21 to see Top Glove generate a total net profit of RM3.296. I have written in the past that they might be missing one quarter in their very off-the-mark estimates (see here).
Kenanga (TP: RM6.80, OUTPERFORM; down from RM8.50)
"We raised FY21E/FY22E net profit by 17%/17% to account for higher ASP/volume growth. The group has guided that nitrile ASP is expected to gradually decline by 3-5% m-o-m which came in earlier-than our expectation but does not expect a sharp drop as demand remains robust, in line with industry post-COVID growth rate of 15-20%. Due to the latest forward ASP guidance amidst diminishing sentiment on the sector, we trim our TP from RM8.50 to RM6.80 based on 13x CY22E EPS."
In a nutshell the re-rating downwards by 20% is justified with market sentiment, which is temporary in nature and has little (if anything) to do with a company's business prospects. For some reason, after it is mentioned that guidance is for blended ASPs to continue to go upwards, the analyst focuses on the nitrile glove ASP. Overall the analyst has raised his FY21 and FY22 net profit estimates substantially while cutting the price target on sentiment concerns.
RHB (TP: RM6.80, BUY; down from RM8.45)
"Maintain BUY with a lower TP of MYR6.80 which is consistent with the reduction in FY23 earnings and long term blended ASP reduced to USD35. We believe the near-term high ASPs will encourage more competition in the future. We also rolled over our DCF methodology to begin in FY22."
This analyst has been providing a little bit more information on how he derives his price target as compared to most other analysts. This makes it easier for us to critique the estimate as well. The first red flag her is the "rolling over" of the DCF model start date to FY22. This means that the analyst completely ignores two full quarters (half a year) in his estimate. More important, as the first half of FY21 represented higher net profit for the company than the total net profit over the past 20 years, the exclusion of the second half of the year from the valuation is extremely notable. Additionally, this analyst (as well as many of the other analysts) does not mention the increased production capacity that was announced through CY2024 (first half of FY25 for the company), and apparently doesn't take it into account in his valuation model (see here).
Maybank (TP: RM4.85, HOLD; down from RM8.65)
"We maintain our FY21-23E net profit which has already assumed for lower ASPs ahead. However, our FY21-23E earnings per share forecast is reduced by 4%/14%/14% on a higher share base, as we assume that its proposed listing in Hong Kong will go through."
"Additionally, in view of the aggressive expansion by the China’s glove-makers, our DCF-based target price for Top Glove (WACC: 8.2%, LTG: 3.5%) is cut to RM4.85 (-44%) as we roll forward our valuation to FY24E (from FY21E) and lower our LTG to 3.5% (from 4.5%)."
The downward re-rating is by 44%. Maybank take into account both the Hong Kong listing, thus reducing their EPS estimates for the next 3 years, and the incoming extra competition. The first concern is of short-term nature, whereas the second one is of long-term nature. However, while both of these considerations are important, the analyst takes the short-term dilution into account without taking the extra capital implications into account. Note that Top Glove have declared their plans of raising capital in the Hong Kong stock market since at least October 2020, so taking this into account now without having made allowance for it with previous valuations is not explained. The analyst also takes into account potential delays in expansion during CY21-22 in regards with Top Glove's plans, without seemingly making similar assumptions in regards with the plans of the China players. I will leave the "rolling over" of valuations to FY24 without extra commentary.
Conclusive Notes
The largest part of value in the job and reports of a financial analyst comes from them having direct access to management of companies. This allows them to get proper guidance on future prospects. It is possible that in certain cases management might mislead the analysts of course, but that doesn't appear to have been the case with Top Glove. On the contrary, as mentioned in the beginning of this article, Top Glove's earnings were markedly expected even to someone who wouldn't have had direct access to management guidance. Additionally, to be sure, most analysts have adjusted their earnings forecasts upwards.
By making frequent and significant re-ratings with the exclusion of any material news, financial analysts diminish the value of their work, making it effectively obsolete the moment it is released. Re-ratings to the tune of 20%-50% can only objectively be justified by the transpiring of either horrible or incredibly good unexpected news. To give you an example of how material such news need to be, the closure of factories of Top Glove in November/December 2020, for which the company guided would result in 3-5% drop in earnings for the financial year, could have resulted in a downward re-rating in the range of 10% potentially, or even slightly higher if "ESG concerns" would be taken into account. This is still far below anything that could justify a re-rating by 44% for instance. Such a re-rating, without any material news, can only mean that the analyst has been completely wrong in their work previously due to reasons solely related to their own capabilities.
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
16 people like this. Showing 33 of 33 comments
Back in 2020, i always find that TopGlove management has been very approacheable to the IBs analysts. With various zoom briefing on the company progress, even before the super profit being annouced. And all IBs started to give sky high TP, some even give TP RM100, citing "paradigm shift", "structural changes" etc.
Now after 3Q of superprofit, every q beating previous q, and all IBs started selling the shares like a PN17 company and reduced the TP.
It really make one wonder their motives and competency.
Also a lesson for all corp management, all these so called IB analysts are no friend of you, they will skin u alive if they had a chance.
2021-03-10 15:18
These analysts are by nature biased. Most of their reports are after the fact, and to serve their ( and bosses?) purpose. I normally just take them at face value, their use to me for investment purpose is , regretfully , minimal.
2021-03-10 15:25
Some of these analysts report with regards to TG is utter garbage. Reports produced with clear bias and intention to mislead. Completely useless garbage!
2021-03-10 15:52
bpsiah, BeLikeBuffett, patrico8, LimitUp, thank you for your comments.
I just wanted to mention that not all reports are questionable. For instance, the reports of PublicInvest and HLIB make a lot of sense.
PublicInvest revise their FY21 earnings forecast upwards by 13%, and they adjust their price target slightly upwards (by about 4%).
HLIB just make minor balance sheet adjustments, and correspondingly adjust their price target by 8 sen upwards, to RM8.14.
This is the type of movement that is expected from self-respecting analysts.
2021-03-10 18:45
Thanks BenTan for another excellent post.
These reports makes us question the agenda (or plain incompetence ?) behind the downgrades.
The disparity between the share prices, these few analyst reports and the performance of the underlying business are getting wider.
such a big disconnect baffles me. What are they trying to achieve?
2021-03-10 19:09
obviously this person is paid by ah chai or other glove gurus
he only appeared after selldown of Top Glove last year
2021-03-10 19:34
Many of the analysts have been working in the IB for many years. If their estimation are really accurate, they already quit their job and enjoy life with their fruitful investments. If you follow their recommendation and TP, u will follow them work till 65 years old!
2021-03-10 20:17
There are times when analysts are racing to be a joker. The current one is MAYBANK Lee
2021-03-10 20:44
IB won't help retail investors make money, simple as that. Jus do the opposite of what they said, then we should do fine.
2021-03-10 21:50
obviously valendinlou and dickyme is paid by JPig mor0ns or the evil shortists. or the maybank ANALysts.
2021-03-10 22:10
Absolutely!.....and it saddens me to see the level of professionalism among some of these anal-ysts on display for all to see! Keep up the great work, Ben!
2021-03-10 22:26
Hi Ben, thanks for another great contribution. I agree with your criticisms on the analysts' work.
I actually made a similar comment in your article on Supermax last week. The question then was why Supermax price continued to slide despite most analysts’ buy calls. I postulated that the market dominated by institutions simply doesn’t trust analyst inputs.
https://klse.i3investor.com/blogs/bursainvestments/2021-03-02-story-h1541975241-Supermax_Trading_at_Forward_PE_of_3_3_While_Sitting_on_RM3_56_Billion_C.jsp
Sell side analysts are known for adjusting their TPs to stay not far off from the current market price. If the market price has dropped by say 20% since the last quarterly report, they may adjust their TP down by roughly 20% in the current quarter while still maintaining their buy/ hold calls.
The valuation assumptions and calculations are reversed engineered accordingly. It happened last year when the price was on the way up, and it happened this year again when the price was on the way down.
Moreover, analysts also need the “safety in number”. Not only their TPs are usually not far off from market price, but also not far off from one another. There is no reward for being a hero. The odd one out is usually hammered. As you've commented, Affin Hwang analyst was ridiculed in July last year when it put up a TP of around RM60 (RM20 after split-adjusted), and a bull case of RM110 (RM37 split-adjusted)!
https://www.theedgemarkets.com/article/top-gloves-fair-value-could-surpass-rm110-affin-hwang-says
If the Affin analyst was forgiven, the same cannot be said of the JP Morgan analyst who went the other extreme by assigning the infamous RM3.50 target price in Dec last year.
https://www.theedgemarkets.com/article/jp-morgan-pegs-these-glove-makers-fair-value-half-their-market-price-says-supernormal-cycle
With such experiences, the analysts have good (personal) reasons to maintain buy calls with TP’s just a few notches higher than the market price. What they did not do well is to cover their tracks in their valuation work, as you’ve rightly highlighted. But such a mistake is common in the rush for time. Analysts often have to churn out multiple reports overnight during reporting seasons.
However, their valuation mistakes cut both ways. I’ll take the RHB report you highlighted as an example.
You’ve rightly pointed out that the analyst overlooked 2 quarters of earnings for FY21. Given the cash flow for FY21 was estimated at around RM10 billion, it means he missed out about RM5 billion for Top Glove. Divided by about 8 billion shares, an extra 60+ sens should have been added to the latest TP of RM6.8, making the TP close to RM7.5.
However if you look at the DCF valuation table, the analyst assumed only an annual CAPEX of RM500 million. But Top Glove press release has stated that it “has earmarked RM10 billion for CAPEX over the next 5 years from FY2021 to FY2025”.
In other words, between FY2021 to FY2025, the analyst has underestimated an investment cost of close to RM 7 billion. Converting to present value that was about RM6 billion or about 75 sen per share. These two errors that roughly cancel out one another. The "corrected" TP ends up about 10 sen lower or RM6.7.
But I won’t blame the sell side analysts. This is the industry norm. The is also not restricted to Malaysia. The reason that sell side analysts exist is for brokerages to get their clients to do more trading and generate more commission revenue.
Wonder why the number of buy calls always far outweigh the number of sell call? Besides not offending their investment banking clients (i.e. companies under coverage like Top Glove here), it’s far easier to get more people to trade with buy recommendation than sell recommendation.
That’s why I am cautious when quoting/ using analyst figures when doing my own valuation.
2021-03-10 22:29
I think in every quarter, the gang of IB tosses a coin to see who gets to be that silly ol'scapegoat that writes silly reports so that they'll have a "convenient story" (on standby) to publish when they need to drive the price down for their warrant's sake.
So this Q happens to be Maybank!!! Congrats MBB :)
2021-03-11 00:32
Hmmm... actually on second thought maybe MBB wrote that report in rage lahh. Coz Top Glove did dethroned them & took the pole position for the highest PAT in a single quarter in Msian history right? Timing was perfect for a revenge-report.
2021-03-11 00:33
The analysts are at it again, increasing their net profit estimation while lowering TP at the same time. The analyst's view from Maybank is very perplexing indeed.
I do agree that INTCO and Bluesail's aggressive expansion plans are a cause of concern but do you really think Topglove is just going to give up its crown?
Any glove manufacturer worth their salt would know that you need to expand production to more than 100b in the next few years. If not, you will lose your market share to INTCO or maybe even Bluesail.
That is exactly what Topglove and Harta are doing now, they are defending their market share. Armed with plenty of cash, I believe they will be able to increase productivity as well with increased robotics application and further automation. If you ask me to choose between INTCO and Topglove, I like my chances with the latter.
2021-03-11 10:24
"Such a re-rating, without any material news, can only mean that the analyst has been completely wrong in their work previously due to reasons solely related to their own capabilities."
...
Many investors at i3investor had been wary of these IB analysts' target price for gloves counters since a few months ago. So they stayed away from these counters - or at least didn't add - despite some supporters continuously harping on those TPs, arguing how `cheap' they are. The cautious investors managed to protect their capital during the bad period when gloves were pushed down by short sellers and many investors panicking.
Anyway, I feel counters like TopGlove offer good value now. Never mind if the IB analysts have reduced their TPs, and even with new supply from China and elsewhere. The fact remains that as a business, glove companies will still be in a comfortable position in the coming months. Therefore it's prudent to have a glove counter or two in our portfolio. For the sake of balance.
2021-03-11 11:10
treack, muk912, Gaussian, YC88, LaoTzeAhSir, Anthem2, observatory, ooi8888, CJkenho, bclassinvest, Mat Cendana, thank you for your comments.
I agree with observatory that one of the main reasons for these "TP cuts" is that the price targets need to be nearer to the actual market price, other than anything else, precisely because that promotes more active trading.
One thing that stands out of course is Maybank's position of course - from markedly bullish to very bearish within a very short span of time. Coincidentally, one of the ITM CWs that expired in end-Feb was issued by Maybank. It might be just a coincidence of course.
2021-03-11 11:46
@Ben Tan, all analyst if I am not mistaken did not report or take into consideration that one of the expansion for TG is to have their own Nitrile plant. They will be able to control their costs much better than other players.
Correct me if I am wrong.
2021-03-11 21:57
After reading all these comments and insights, I think Kossan may be at risk as it is too lazy to act.
2021-03-11 23:53
If good enough then will be kyy lo. He mentioned kps, boom limit up. You all keep talking gloves like sky high, but the price still keep lower. Haiyaa... Read also waste time lo.. can't push up stock. Pandai tiok ho, don't pandai pandai. Heng ong huat arh!!!
2021-03-12 07:54
Most of these analysts are below age of 30. Some are even in early 20s. How many of them really know real world battle in stock arena? That's why I trust JP Morgan assessment on the situation more.
2021-03-12 08:11
You ask our local analysts where is the nearest Starbucks, they know la.
2021-03-12 08:12
No one is wrong. Neither do the bank analyst here. As usual, we don't trade based on IB report or your report as well. At the end, this is just each individual bias opinion. Who can really predict the future?
2021-03-12 10:17
Brutus, supersaiyan3, EatCoconutCanWin, gohkimhock, Stockisnotfun, thank you for your comments.
Brutus, out of the reports I've had access to so far, only Maybank's mentions the NBR plant.
Stockisnotfun, we aren't really discussing predicting the future here. We are rather discussing the validity of some of the assumptions given as justification by the analysts, as well as pondering over justifications that have seemingly not been provided.
2021-03-12 13:46
Good article but misleading title.
Analysts didn't cut TP due to stellar quarter. It was due to other factors.
2021-03-13 00:04
CynicalCyan, thank you for your comment.
I beg to differ. As you can see from my notes, a number of analysts might have cut their price target because they "roll over" their valuations to some seemingly random future dates. In other words, the re-rating downwards is precisely because of this stellar quarterly results - the great quarter has passed, so the presumption is that hereon after the company loses an enormous part of its present value (at least this is how I understand the "rolling over" effect).
2021-03-13 12:43
Ben Tan, agreed fully with your observations and critique. The IBs downgrade are disappointing despite Topglove management guidance that 2HFY 2021 will be better and 1H earning already hit 5.26 billions even though there was a 2 weeks shutdown which caused 8 % less shipments in.Q2. You rightly pointed out that had the shutdown not occurred, the profit.would have hit 3.1 billions. With topglove guidance, we.should expect 2H total earnings to exceed 6.5 billions . By taking the 1H and divide by 2 as the projected qtrly earnings for Q3 and Q4 is obviiously incorrect. The analysts should upgrade instead of downgrades Topglove .
2021-03-14 08:28
When come to recovery play insas will be the best mah...!!
Its Nta is rm 2.83 per share loh!
Its intrinsic value when inclusive of inari mark to market gain exceed rm 5.00 per share mah...!!
Insas has a net cash exceeding Rm 0.90 per share woh!
When comes to earnings based on half year result insas profits is already rm 148m or eps 22.2 sen loh!
It is anticipated insas can hit eps of 40 sen per share giving pe of 2.1x mah!!
Thus insas is a stock which have both strong earnings of eps of 40 sen & back up with strong intrinsic share value of exceeding Rm 5.00 per share compare with the huge discounted share price of rm 0.875 per share loh!
Thus INSAS IS A SCREAMING BUY loh which u should not missed mah!
JUST jump in b4 too late loh!
The opportunity is now when insas is still wonderfully undervalue mah..!!
The 1st step u must find out got:
1. Got margin of safety factor
2. Got strong Balance sheet factor
3. Got big cash factor
4. Got reasonable div factor
5. Positive earnings factor
That means got 'R 'factor can buy or sailang loh...!!
Insas hathaway is the best ' R ' factor stock 2021.
Don missed this opportunity loh
2021-03-14 09:48
imagine, they hold tons of ticket, when price drop and keep promote with buy , will they buy or sell to you？ sooner and later, become hold and then sell will lower and lower TP.
If you follow their recommendations, you burn.
2021-03-14 09:55
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bpsiah
Never ever follow these analysts estimation. Their estimations are like horror stories.
2021-03-10 15:15