This is the price war that the analyst talking about. Seems like the analyst got read from their toplove HK IPO file in risk section. He is actually stated the fact from the IPO file.
Stockisnotfun, observatory, MF0001, OrlandoOilSemiconT, thank you for your comments.
observatory, I can definitely see where you are coming from and at a glance it definitely seems odd that the company would be buying back shares at higher price and then asking markets for capital at a lower price. I have been keeping tabs of the share buybacks since last year, and the VWAP is RM7.11 (simple average = RM7.05). Only a minuscule amount of shares have been bought at price RM8.
My opinion is that no one has expected that at the time the listing will get announced, the market price will be at the current level. There is no way for them to issue the notice other than at a price near to the market price as of the last day before the announcement has been made. As discussed, RM5.20 is not the actual price at IPO though. We will have to wait and see how the book building process goes. On management's skills, I think they were genuinely surprised and I believe TSLWC and the BoD buying shares with their own money is a way to prove sincerity of intentions. As described in my post above, the current price, or really any price over the last several months, makes little economic sense.
OrlandoOilSemiconT, you are raising a good point. If the underlying logic is that TG is falling today due to the HK listing, then logic is failing with regards to the other counters falling. In fact, funnily TG fell at the same rate as Harta, and to a much smaller extent than Supermax or the "second tier" glove companies.
If you are a long term holder n have excess money to invest top gloves is very good but most of the retailers are not long terms investors n most retailers are gamblers n treat klse as casino
Hi Ben, thanks for your reply again. I too would like to believe Tan Sri Lim is sincere he has bought a large number of shares with his own money. Perhaps he just miscalculated in the early euphoria when Top Glove almost overtook Maybank's top spot in KLCI, something I wish he had never said in the public. Anyway, this incident has cast doubt on my view of the company (as compared to say Harta)
Let’s get back to your DCF calculation. I’ve reproduced it and have a few comments.
You’ve basically adopted a Free Cash Flow to Firm method, but using projected profit to replace the projected cash flow. I too think this rough estimate is good enough to get an approximate value.
By using the assumed capacity, ASP and net margin from various sources, you’ve calculated the net profit as CY2021: RM 12,503 million CY2022: RM 5,943 million CY2023: RM 3,097 million CY2024: RM RM2,319 million CY2025: RM 1,572 million (I) The total net profit for first five years = RM25,434 million
I believe you’ve estimated the terminal value from Year 6 onwards as follow: (II) Terminal value = Year 5 net profit / (cost of capital – perpetual growth rate) = RM1,572 million/ (7% - 5%) = RM78,578 million
(III) Current net cash = RM 1,210 million
Enterprise value = (I) + (II) + (III) = RM 25,434m + RM 78,578m + RM 1,210m = RM 105,222 million (note: slightly different from yours by half a percent) Divided by the share base of 8,015.659 million, the value per share = RM13.10 (I ignore the dilution effect of HK listing, which could have lowered the value).
However, there are a few points I want to highlight. First, the above calculation has missed the step of converting calculated values in (I) and (II) to present value by dividing them with the chosen cost of capital at 7% per annum.
Adding back the step, net present value (PV) of the first five years are CY2021: RM 12,503 million/ (1 + 0.07) = RM 11,685 million CY2022: RM 5,943 million/ (1 + 0.07)^2 = RM 5,191 million CY2023: RM 3,097 million/ (1 + 0.07)^3 = RM 2,528 million CY2024: RM 2,319 million/ (1 + 0.07)^4 = RM 1,769 million CY2025: RM 1,572 million/ (1 + 0.07)^5 = RM 1,121 million (I) The PV of net profit for the first five years = RM22,294 million
(II) Terminal value = Year 6 net profit / (cost of capital – perpetual growth rate) = Year 5 net profit * (1 + growth rate) / (cost of capital – perpetual growth rate) = RM1,572 million * (1 + 5%) / (7% - 5%) = RM82,507 million
The PV of terminal value = RM82,507 million/ (1 + 0.07)^5 = RM58,826 million.
By enterprise value = (I) + (II) + (III) = RM22,294m + RM58,826m + RM1,210m = RM82,330 million. Value per share = RM10.3
The second point is terminal value is very sensitive to the cost of capital and perpetual growth rate used. In the above calculation, more than 70% of the value comes from the terminal value, which is determined by RM1,572 million * 1.05 / 2%.
If the denominator (cost of capital – perpetual growth rate) is 3% instead of 2%, the enterprise value will be RM60,550 million, and the per share value is RM7.6
If the denominator is even higher at 4% (instead of 2%), the enterprise value will be RM49,551 million, and per share value RM6.2.
Moreover, the chosen terminal growth rate of 5% is too high. It's a weakness in DCF calculation that it assumes growth into infinity. Therefore as a rule of thumb, the growth rate cannot be larger than the overall economic growth rate. Otherwise, the company will grow into a size larger than the overall economy, which is absurd.
A more reasonable approach is to assume after Year 5 (CY2025), Top Glove will enjoy another 5 years of high growth at 10% a year, and after that a perpetual growth of 3% (which is considered high; usually analysts only give 3% if they want to “bump” up their TP!)
Using this approach, the PV for the next 10 years is RM28,386 million. Adding the PV of terminal value RM33,131 million and net cash RM1,210 million, enterprise value is RM62,727 million. The value per share is RM7.8.
Even this value is highly sensitive to various other assumptions. By changing the cost of capital assumption especially we could get a vastly different result.
observatory, thank you for your detailed note. Comments like yours are one of the reasons why I keep writing here.
Just to confirm, the PVs of the cash flows for the next 5 years are discounted in my calculations. What I've apparently missed doing is discounting the terminal value, i.e. I've used RM82,506.93 as the terminal value instead of the discounted value.
I am likely not as familiar with the model as you, but I agree that projecting profits for a longer period of time before adding terminal value would give us a more accurate estimate. At the same time the further into the future we go the more not-based-on-present-evidence assumptions we need to make. The 5-year projection is relatively safe and it gives us a total PV of the profits + cash on hand = RM23.41 billion. Most assumptions thereafter will be our own input anyhow.
As I said before, I would divide NPV calculations into three stages, i)supernormal profit level, ii) normal growth level after pandemic (10% maybe), iii) terminal value (5% maybe). Discount, then add back into NPV.
However, now the situation is a bit different from my previous projections. Vaccine's effectiveness surprises us all, what we are seeing is 10% vaccination of population enough to reduce confirmed cases by 80% (because the "multiplier" effect is reduced).
What big 4 needs to do NOW, is to scale back the expansion (which I think they will do so soon).
Hey Ben and other contributors, thanks a lot for the good discussion here. Keep up the good work! It's so much civilized and productive here compared to the main forum!
HrryPttr, supersaiyan3, Jiang Ng, i3gambler, thank you for your comments.
supersaiyan3, unfortunately the recently observed drop in cases was not the result of vaccination, but of very strict containment measures imposed around the world. Most countries have been under different forms of lockdown since before Christmas. The problem countries are facing right now is that more contagious variant spread has already been confirmed, so easing the measures right now will be dangerous. On other hand it will be devastating to the economies to keep the measures as they are. It is likely that we will see at least 1 or 2 more openings and closings of the countries, especially in Europe and in the US, by the time enough people are vaccinated.
LOOKING AT THE FORECAST U WILL NOTICE TOPGLOVE PROFITABILITY IS TUMBLING EVERY YEAR IS TUMBLING EVERY YEAR 2021 TO 2025 DESPITE INCREASING CAPACITY FEW FOLD LOH!
Based on the aforementioned ASP projections, and based on average utilization rate of 86%, we get the following sales revenue projections for each calendar year (+ in RM, assuming USD1 = RM4):
CY2021 = $6.251 billion (RM25.007 billion)
CY2022 = $4.870 billion (RM19.480 billion)
CY2023 = $3,871 billion (RM15.484 billion)
CY2024 = $3.866 billion (RM15.462 billion)
CY2025 = $3.929 billion (RM15.715 billion)
TOTAL (5 years) = $22.788 billion (RM91.150 billion)
Note that these are calendar year projections and not financial year projections. The financial year for Top Glove starts in September, so one quarter of the financial year is always within the previous calendar year.
Enterprise Value
Based on financial analysts' projections, the net profit of Top Glove will be approximately 50% in 2021, 30% in 2022, and 20% in 2023. Let's assume it will go down to 15% in 2024, and 10% in 2025. In this case the net profit for each calendar year should be:
This ASP graph is closer to real time than those numbers that Uncle Koon brought up. No matter how I calculate, I still cant get USD120 ASP that has been brought up many many weeks/months ago. The numbers dont lie... you can easily get capacity numbers and times ASP to get each glove makers revenue.
Disposed a bit first to make d price drop thn later buy back a lot at cheaper prices
EPF doing price manipulation
3,866,400
Acquired
Direct InterestName of registered holderCitigroup Nominees (Tempatan) Sdn Bhd - Employees Provident Fund BoardAddress of registered holderCitigroup Nominees (Tempatan) Sdn Bhd Level 42, Menara Citibank 165, Jalan Ampang 50450, Kuala LumpurDescription of "Others" Type of Transaction225 Feb 2021
177,500
Disposed
Direct InterestName of registered holderCitigroup Nominees (Tempatan) Sdn Bhd - Employees Provident FD BD (TEMPLETON)Address of registered holderCitigroup Nominees (Tempatan) Sdn Bhd Level 42, Menara Citibank 165, Jalan Ampang 50450, Kuala LumpurDescription of "Others" Type of Transaction
Based on the aforementioned ASP projections, and based on average utilization rate of 86%, we get the following sales revenue projections for each calendar year (+ in RM, assuming USD1 = RM4):
assuming rm25b is absolute peak. in 5 years, revenue drop like this 25b>15b>10b>8.7b>8b. Historically tg margin is around 7-9%. I assume its 9%. and i give it a fpe 25 okay? its very optimistic. 8b(0.09)(25) = 18billion market cap. at its current valuation i dare to say it will drop by another 50%.
Based on financial analysts' projections, the net profit of Top Glove will be approximately 50% in 2021, 30% in 2022, and 20% in 2023. Let's assume it will go down to 15% in 2024, and 10% in 2025. In this case the net profit for each calendar year should be:
CY2021 = RM12.503 billion
CY2022 = RM5.844 billion
CY2023 = RM3.097 billion
CY2024 = RM2.319 billion
CY2025 = RM1.572 billion
The company also has RM1.21 bill
__________________________
this is somewhat correct but the profit is still too high for 2025. u make a grave mistake. u know the company is declining but u chose to add all 5 years instead of the normalized year profit.
little bro investing is about projection into the future. we already know the future asp is going to normalized why still bother take account into asp of unnormalized period.
Why this obsession with wanting to look back at pre-pandemic levels? Nostalgic, is it? The pandemic is a world changing event, the magnitude of which it's multiple times that of "911"! After 911, billions were spent on airport security system upgrades and aircraft fortifications and it hasn't stopped. The pandemic has created an awareness never seen before and global healthcare strategic plans are being put in place, as we write. It's a different world out there, boys!
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....
Stockisnotfun
5,143 posts
Posted by Stockisnotfun > 2021-03-01 19:33 | Report Abuse
來自其他手套製造企業的競爭的影響以及我們分銷渠道中買家議價能力的提高可能使我們
的價格下降,使我們無法提高價格以抵銷增加的成本,或增加資本投資或營銷和其他
支出。此外,我們可能無法預測或充分應對消費者偏好的變化或新的營銷和銷售形式
的發展
This is the price war that the analyst talking about. Seems like the analyst got read from their toplove HK IPO file in risk section. He is actually stated the fact from the IPO file.
https://www1.hkexnews.hk/app/sehk/2021/103230/documents/sehk21022601983_c.pdf
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