Trading With A View
(Tradeview 2020) - Yield Will Protect Gloves Share Price From Falling Further
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Publish date: Sat, 21 Nov 2020, 03:10 PM
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Author of Once Upon A Time In Bursa : The MONEY Equation. A corporate strategist, lawyer & avid investor who has two great passion in life: Financial Markets & Real Estate. A true fundamentalist and financial writer motivated to tip the scale in favour of retail investors. Believe the stock market can be force for good.
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Contact for update : tradeview101@gmail.com
Telegram: https://telegram.me/tradeview101
In 2019, EPF declared 5.45% Dividend yield for Conventional Deposits and 5% for Shariah Compliant Deposits. The Divided Yield is highly anticipated every year by savers especially retirees who would rely on yearly withdrawal to sustain their livelihood. If the EPF yield declared for that year is bad, there will be huge public backlash. Hence, Government of the day will do whatever they can to ensure dividend payout is good or at least above expectations.
In fact, if we compare the pension fund returns for EPF to others around the world, our EPF has one of the best performance in the world. Now, when it comes to EPF savings, savers are very particular about dividend yield given. What I find strange is that majority of investors in the stock market, especially during bull runs is no bothered about Dividend yields. Naturally, these investors believes that the stock they are investing should give better returns in terms of capital gain compared to the miniscule dividend yield.
Following the vaccine news announcement by Pfizer & Moderna, the vaccine positivity has led funds to rotate away from high growth stocks to value stocks. A good example in Malaysia would be the shifting of funds from Tech & Glove stocks to Banking and some recovery themed stocks. This has resulted panic selling across growth stocks and panic buying in value stocks. This chart below as a comparison is very telling :
Now the question is whether such movement in the stock market is warranted? I think there are two points to this question.
One, there is a difference between value stocks and recovery stocks. Value stocks are company with strong balance sheet and fundamentals which business were somewhat impacted by the pandemic / MCO. The value stock has enough assets, cash to navigate through the pandemic without the risk of default. These stocks are like the banks, telecommunication, utilities and insurers.
Two, recovery stocks are referring to companies which are mostly badly affected by the pandemic such as tourism, hospitality, airlines, retail, travel etc. These companies are not equivalent to value stocks because these companies may not have strong fundamentals to begin with. In effect, it means there is default risk to these companies. So I do agree in buying value stocks and always keeping them in your portfolio but I do not agree that one should look at recovery stocks any time in the near future.
One, there is a difference between value stocks and recovery stocks. Value stocks are company with strong balance sheet and fundamentals which business were somewhat impacted by the pandemic / MCO. The value stock has enough assets, cash to navigate through the pandemic without the risk of default. These stocks are like the banks, telecommunication, utilities and insurers.
Two, recovery stocks are referring to companies which are mostly badly affected by the pandemic such as tourism, hospitality, airlines, retail, travel etc. These companies are not equivalent to value stocks because these companies may not have strong fundamentals to begin with. In effect, it means there is default risk to these companies. So I do agree in buying value stocks and always keeping them in your portfolio but I do not agree that one should look at recovery stocks any time in the near future.
The reason is because even if vaccines are rolled out, it will be done gradually and the lasting impact of Covid-19 is not eradicated overnight. These recovery stocks will take a long time to return to pre-Covid 19 level earnings. Currently, the market investors or speculators are just riding on the optimism of reopening of economy and resolution of the pandemic ahead of time. This brings me to why Glove stocks are still necessary to be kept in your portfolio even after vaccine announcement.
For the longest time, Glove stocks were given many different categorisation by financial analysts. Some called Glove stocks as cyclical, some say defensive, some say growth but which category does Glove stocks truly belong to?
It is cyclical in nature due to the events of the world (HIV, SARS, H1NI, EBOLA, Covid-19) and fluctuating raw materials cost (Latex Gloves depends on Natural rubber, Nitrile Gloves depends on Nitrile Butadiene Rubber which is linked to oil). Why then some call Glove stocks defensive? The key reason in my view is because of its designation as part of healthcare sector and it is apolitical with continuous demand over the years.
In my humble view, Glove stocks are quintessentially growth stocks. There is no denying their growth stock nature just by looking at their earnings and share price chart over the past 10 years. But, due to the supernormal profits in FY 2020, 2021 and potentially 2022, Glove stocks are moving from Growth to Yield.
One of the key determinant of whether a share price moves up organically is earnings. Excluding M&A and corporate exercise, the direct correlation between share price uptrend is earnings growth. With earnings growth, the increased in profits / excess cash will be used to lower debts, pay dividends, investments, capital expansion or cash reserves. This is why I say Gloves are moving from Growth to Yield stock especially so within the next 1 year window. Just look at Top Glove as an example, it has in place a 50% Dividend Policy. Which in effect means, 50% of the profits would be used for dividends to reward shareholders every financial year. So let's do a simple back of the envelope calculation to understand the potential dividend that Top Glove will declare in FY 2021.
Top Glove :
FY 2020 Profit after Tax = RM 1,867 Billion 50% Dividend Policy = RM 934 Million
FY 2021 Profit after Tax = RM 10,378 Billion 50% Dividend Policy = RM 5.19 Billion
FY 2022 Profit after Tax = RM 5,295 Billion 50% Dividend Policy = RM 2.65 Billion
The current share price is RM 7.30 as at 20th November :
The Dividend per share for FY2020 is 11.8 sens which translates to Dividend Yield of 1.6%
The Dividend per share for FY2021 is 63.5 sens which translates to Dividend Yield of 8.7%
The Dividend per share for FY2022 is 32.4 sens which translates to Dividend Yield of 4.4%
Do you think the current share price of Top Glove is cheap or expensive based on looking at its earnings and yield? Objectively, it is undervalued even looking at FY 2022 where the analyst projects a fall in earnings due to the end of Covid-19 pandemic. Taking a normalise averaged out Dividend Yield across 3 years, Top Glove shareholders at current share price would enjoy 4.9% per annum.
Now, lets turn to Hartalega. It has 60% Dividend Policy where 60% of the net profits every financial year are distributed to reward shareholders. So let's do a simple back of the envelope calculation to understand the potential dividend that Hartalega will declare in FY 2021.
Hartalega:
FY 2020 Profit after Tax = RM 435 Million 60% Dividend Policy = RM 261 Million
FY 2021 Profit after Tax = RM 2.88 Billion 60% Dividend Policy = RM 1.73 Billion
FY 2022 Profit after Tax = RM 5.07 Billion 60% Dividend Policy = RM 3.04 Billion
The current share price is RM 14.40 as at 20th November :
The Dividend per share for FY2020 is 7.75 sens which translates to Dividend Yield of 0.55%
The Dividend per share for FY2021 is 50.5 sens which translates to Dividend Yield of 3.5%
The Dividend per share for FY2022 is 88.7 sens which translates to Dividend Yield of 6.16%
Similarly, do you think the current share price of Hartalega is cheap or expensive based on looking at its earnings and yield? Objectively, it is undervalued especially looking at FY 2022 where the analyst projects a continuous growth in earnings despite the end of Covid-19 pandemic. Taking a normalise averaged out Dividend Yield across 3 years, Hartalega shareholders at current share price would enjoy 3.4% per annum.
You can see that company earnings, growth and yield are all correlated. The most important point to takeaway is this - the company's share price should be determined by its ability to deliver earnings first, grow earnings second and sustain earnings third. This will naturally form the transition phase of a company from growth to value to yield stock.
With that in mind, do you think that the Glove stocks, both Hartalega (RM14.40) and Top Glove (RM7.30) specifically, would be trading at current price or even lower when the coming years they would be having a Dividend yield of 3.5% & 8.7% in FY 2021, 6.16% & 4.4% in FY 2022? Definitely no as investors and funds who chase for yields will move the share price up. The worst case scenario - you still get to collect dividend at a higher rate than FD.
I understand everyone have their own view and opinion on the glove sector because it is an industry that is relatable, understandable and Malaysia is the world leader. The scrutiny adopted towards the sector is of higher standard compared to other sectors because of the access to information and knowledge. Whether one uses DCF, PER, Dividend Yield or EV/EBTIDA to value glove companies, at the end of the day, valuation is an art, not science. There are many factors to consider and it is hard to say one's valuation method is better than the other.
This was an article I wanted to write a long time ago during the September Glove selloff. I held back from publishing because I was anticipating Glove earnings season would clash with a vaccine newsflow month which may lead to a potential selloff. I was hoping that readers and investors who are rational would be able to see the record earnings and not succumb to headlines news and fear to panic sell. Sadly, many neglected to view the facts & data objectively. Even some (not all) professional analyst were similarly panicking where their judgment was impaired by mainstream view and "herd mentality".
The recent good news shows that what EPF is doing is in line with the key message in my article. EPF was the big buyer on 17th November 2020 (Tuesday) when gloves were still being sold off after Pfizer and Moderna announcement. EPF did not buy small as they bought close to 174 million shares more than RM 2 billion worth bringing them above the 5% substantial shareholding level. Hartelega being my Long Term Value Pick means there is little you need to worry about and EPF being a long term shareholder buying into Hartalega is a strong validation of this investment thesis. It is also a confidence booster to the sector.
My simple conclusion remains :
1. Severe shortage of gloves in the market,
2. Earnings visibility for at least 1 year minimum for the sector,
3. The companies will be delivering continuous record earnings in coming quarters
4. Transition from Growth to Yield or Growth + Yield stock,
5. With the recent selloff, Glove stocks have become very attractive valuation wise.
If you are wondering whether you should still hold glove stocks in your portfolio, that is a decision you must make on your own. However, the history of the financial markets has taught me that yield is very important to investors and funds, hence it will ultimately form the bottom to protect glove stocks from falling further. When the downside is protected, the upside takes care of itself.
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Food for thought:
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Discussions
3 people like this. Showing 18 of 18 comments
Of all the newcomers to Gloves...mahsing hold the greatest Prospect loh!
2020-11-21 18:07
The writer has a low IQ
There are recovery stocks that have strong balance sheets that are ALSO value stocks because they are very cheap AND that pay dividends
That stock is Genting Malaysia / Genting
In 1 years time we shall see the performance of gaming companies vs the hype of gloves
The stock market is a voting machine in the short term, a weighing machine in the long term
Gaming is forever and eternal and will once again show its enduring quality
Sincerely,
EMSVSI
2020-11-21 18:19
The problem is the covid19 affected stock can survive b4 covid19 over leh ?
2020-11-21 18:22
Emsvi, who r u 2 call people low IQ. Who gv u d rights? U can’t even write a proper article. Look in d mirror b4 insulting. Can’t even read accounts talk crap. Low IQ? U can’t even do stock valuation. Super embarrassing.
2020-11-21 18:27
Simple mah...!!
Look at the logic loh...u r investing in Gloves stock bcos of 1 or 2 years good earnings or R u investing for the long term leh ??
Surely sustainable good share price is not depending on just 1 or 2 yrs good short term earnings mah...!!
If that is true...the conclusion below missed the point loh..!!
My simple conclusion remains :
1. Severe shortage of gloves in the market,
2. Earnings visibility for at least 1 year minimum for the sector,
3. The companies will be delivering continuous record earnings in coming quarters
4. Transition from Growth to Yield or Growth + Yield stock,
5. With the recent selloff, Glove stocks have become very attractive valuation wise.
If you are wondering whether you should still hold glove stocks in your portfolio, that is a decision you must make on your own. However, the history of the financial markets has taught me that yield is very important to investors and funds, hence it will ultimately form the bottom to protect glove stocks from falling further. When the downside is protected, the upside takes care of itself.
2020-11-21 18:28
Genting n genm already Uturn last week, and gloves uptrend... Tomorrow will continue up till 2023
2020-11-22 12:04
simple buy profit then sell, buy profit then sell, profit money is king. why keep ? buy and sell, easy money......
2020-11-22 12:24
Unfortunately market sentiment has changed dramatically since vaccine news have come out. Everyone knows that glove is going to produce stellar result next year but how about in 1-2 years time.
Eventually glove price will go back to its normal. How soon?? We dont know the answer.
I definitely dont want to hold the high price ticket by then.
2020-11-22 12:58
Big boys always at the buy side..rain or shine..bullet proof..
Retail players pls set n monitor your cut loss b4 buy any stock..
2020-11-22 14:27
If yield protects falling stock prices, why didn't it protect BAT? Stock market sentiments still play a vital role.
2020-12-19 13:08
BAT wrong ex buddy. BAT went thru structural change. Sold factory, move manufacturing facility. Dividend one off & big drop from b4. Not apple 2 apple comparison. Apple 2 orange.
2020-12-19 14:14
Market retail investor dunno how important DY is until d time comes den too late
2020-12-19 14:20
These few days i feel that these short sellers really maximum short kao kao all the glove companies o.
Its like they are going all out to do it. I feel that its weird and u can see that all if not most other cw expiring later in months may or june all fall drastically n the vol are big. Collected back back the ib?
Is it possible rss will be suspended soon or something big is happening in the future for glove stocks? Supermax buidling a factory in the usa. Is this the catalyst?
I dun know. All the best dudes
Just my curious 3 cents of analysing
2021-02-25 11:36
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Something else to consider in your article here.
Top Glove has been aggressively buying back their shares, although aggressive is a somewhat arguable term - depending on which side of the fence you sit on. Their buyback is capped at RM70 million per day, although of course as outside investors, we do not know what the upper limit for the buyback price is set at before buybacks discontinue.
Now whilst our beloved Uncle Koon has of course condemned the buybacks as being counterproductive (since he views it as management trying to support the share price), whilst at the same time throwing in a plug praising his flavour of this time, Supermax - heh, I think there's one other view one should look at.
TG will be issuing a dividend of 50% of their net profit for the quarter. That's their stated policy.
What some investors may not realise is that the their cash flow is far more robust than net profit simply because of the advance payment (deposits/prepayments) paid by buyers, way in advance of delivery. As I understand it, spot order deposits are at around the 50% range, whilst longer term orders (extending up to the 650-660 day backlog) have a deposit of around the 20% range.
Deposits are not counted as profit. Profit is only recognised upon delivery of the goods. Thereafter deposits will then be categorised as revenue, along with any balance of payment.
It is possible for TG to declare the bulk of the prepayments as dividends. They can do so and recognise it as a special dividend issue.
Alternatively though, there is share buybacks. Consider this, there is still another 12 days of trading before the expected release of 1QFY21 results by Top Glove (tentatively set at 9 December).
If you do the math and assuming that TG continues to buyback RM70m worth of shares, up to the end of day of 8 December, and assuming the share price is bought back even at an assumed higher average price of RM8 per share, the amount of treasury shares would then exceed 2.5% of the company's total number of shares.
They could very easily issue a share dividend of 1 for 40 with that amount. Or a higher amount assuming the average buyback price is lower of course.
From the major shareholders perspective (inclusive of the founder), they get to boost their own shareholding by a minimum of 2.5%, without any outlay or activity needed on their own personal trading accounts.
The buybacks then aren't a way of supporting the share price alone, but for the benefit of shareholders (especially the major ones).
How big a dividend are we expecting for the upcoming quarter? Let's put a conservative 10 sen nett per share (high unlikely, since EPS should be MORE than 20 sen for the quarter). At 10 sen against the current RM7.29 price, that's a 1.37% yield for the QUARTER.
What about if a 1 for 40 share dividend is also issued? Using the current share price as a baseline, that's equivalent to another 18.225 sen dividend. Making the QUARTER'S payout equivalent to 3.87%. Pretty good, no?
2020-11-21 17:36