I'd think so. PetDag's business is competitive. Fuel business was also hit by the pandemic. Quite incredible that it was sold at ~25 times forward PE before the pandemic. PetChem may be a better investment. But it's exposed to the volatile commodity prices so earning and dividend are inherently unstable.

@kpower, the article says earning resiliency will continue until RP1 ends. No forecast on RP2.

@unicornbird, tariff may continue to come down, but profit can still grow as long as regulated asset base and efficiency grow even faster. Being a regulated monopoly, I think the base scenario is petgas will grow along Malaysia economy growth.

The other point is the company is near net cash. Given its stable cash flow, it should take on more debt which is cheaper and return excess capital to shareholders.

I think the stock can play a defensive role in a diversified portfolio.

@unicornbird, the tariff under RP2 is set by EC. The dividend payout to petgas shareholders will not be the top priority. But EC needs to set a fair return to encourage investment. But EC needs to also consider end users/ industries which are recovering after the pandemic.

The dividend policy is 50% payout. But excluding special dividends, the past three years petgas has paid up to 72 sen out of about 100 sen earnings. Conservatively I will expect at least 72sen.

@unicornbird, I'm actually new to this stock. This is just my guess. Any long term shareholders here can correct me.

Looking back, net profit grew very fast until 2013-14, but was since stagnant despite moderate revenue growth.

Bursa sentiment was also weak since the 1MDB scandal. Petgas being an index component could be impacted.

Besides until last year I still read the argument that gas is the necessary transitional fuel to a decarbonized world since solar and wind energies are constraint by intermittent power. Gas could replace many coal fired power plants as it emits just half of the greenhouse gas. But with rapid advances in battery storage technology (driven by EV industry), such argument is rare nowadays. Some investors may envision a direct jump from coal to large scale renewables like wind and solar backed up with efficient energy storage. (But according to EC roadmap, gas still has a growing role, just that it's years away)

Looking forward, as share price continues to weaken, yet cashflow remains strong, and a solid balance sheet allowing it to take on more debts, the stock can be defensive.

However I also suspect that some fund managers are concerned about the impacts of upcoming RP2. This may explain some of the selling pressure.

BTW Petgas profitability has little to do with oil and gas price. It's largely driven by regulated asset return. Need to watch for allowed tariffs under coming RP2 and RP3.

Haha, here you appear. After posting your RM20 TP for BAT, you disappeared without a trace. Even old comments were deleted.

@Will188, honestly the concern about RSS is misplaced, except for a few who look for a temporary boost in sentiment. In Bursa CEO’s own words, short selling is a common practice in many other stock markets; and has a legitimate role in adding liquidity and market stability/ price discovery. So it has nothing to do with whether I hold glove stocks or I wish to buy more.

The current RSS in Bursa is restricted to merely 4%. While glove stocks are among the most shorted, the short position has remained relatively stable since early this year. RSS might have added to selling pressure when it was reintroduced 6 months ago. But there has not been an increase in net selling from RSS due to the 4% cap. Still glove stock price continues to slide.

The selling comes mainly from local institutions exiting their glove positions. It is probably more effective to petition local institutions! If can't get Public Mutual and the like to do so, may be can pressure MOF to instruct EPF, KWAP, PNB and Khazanah for a glove bail-out?

But for any long-term investors, RSS is truly a distraction. Even Delta, Lamda or Kappa variants are less important as they could only provide short term sentiments and/or demand.

Regardless of whether Covid will turn more deadly or subside soon, I am confident that glove demand will continue to grow post-pandemic due to growth in healthcare needs and low base effect in developing countries.

The key to watch is therefore not RSS or demand, but supply growth. How much longer can ASP remain high and profitable to incentivize competitors to continue their expansion; and how much and how fast will new supply come online in the next 1, 2 and 3 years?

There are only so many hands in the world. As long as glove business remains profitable, with enough time, more than enough gloves can be produced to put on every hand!

I check out the petition to suspend RSS
https://www.change.org/p/pelabur-runcit-bursa-malaysia-mohon-tengku-zafrul-memberhentikan-restricted-short-selling-rss-seperti-march20?signed=true

The petition starts with “Sebahagian pelabur runcit terutama dalam kalangan Bumiputera”. Exploiting the racial angle to gain advantage?

But looking at some of the 1,700 names who have just signed, a great majority are Chinese names.

Besides the mention of “margin call” in the petition also doesn’t elicit much sympathy.

Let me clarify my calculation shared yesterday. My exercise doesn’t produce a “fair value” of RM3.3. I believe I’ve written it as RM3.3 PLUS/ MINUS an uncertainty range. To me fair value is not a single number but a fuzzy range which changes as fundamentals (e.g. supply, demand, interest rate) change. Every time I do such exercise I get a different number. So I’m sure RM3.3 will not be the last. However at current price the stock is within my comfort range.

For me the valuation process itself is more important than the output. Such exercise forces me to think hard about those assumptions. Besides to start with I also hold a long term diversified portfolio.

Mentioned before I’ve been holding glove stocks before the pandemic as this is one of the few growth sectors in Malaysia. However, I’ve been selling down last year and this is time to rebuild. I’ve already started with Harta. As long as fundamentals do not worsen I'll buy in stages.

I think there is no right or wrong approach here. Each person has his own style, knowledge and risk tolerance. Just find one that suit best.

Yeah, I also keep a watch on Intco.

For those who’re interested you may find a list of Chinese brokerage reports here on Intco
http://stock.finance.sina.com.cn/stock/go.php/vReport_List/kind/search/index.phtml?t1=2&symbol=300677

There is a good platform on Chinese stock exchange where investors can pose questions to the management anytime, and the management replies as and when they see fit. The consolidated Q&A can be found here.
https://ir.p5w.net/c/300677/questionlist.shtml

@pjseow, thanks for your inputs.

@pjseow, to be fair to RHB, they don't assume a drastic drop in output level. They've assumed 70% to 80% utilization during this Phase 1 lockdown period due to the 60% workforce restriction. I think this is a reasonable assumption. Recall Top Glove only achieved 62% utilization (shipment to capacity ratio) when it reported its end of May results recently?

Without a big change in volume, RHB must have assumed a much lower ASP. It remains to be seen whether they are right. Coincidentally their TP is quite close to my exercise above.

I admit there is a lot of guesswork here. The difference is I will just change my inputs as and when I feel the situation has changed. I'm only responsible to myself. I just need to stay objective in order to make sound decision. But the RHB analysts have many non-valuation factors to consider!

I also read the RHB report which has downgraded glove sector to neutral. Supermax TP was slashed from MYR6.60 to MYR3.40.

I think RHB action offers yet another lesson on reading analyst reports. First of all, the trigger for downgrade is Phase 1 lockdown extended. But how could the extension for a few more weeks, or even a few more months, could have possibly halved the TP? Besides RHB has stated that it only reduces FY21 earning by 6%, and have kept FY22-23 earnings unchanged.

To RHB credit it has shown its DCF valuation (some analyst reports will simply hide the calculation in a black box). The analyst has aggressively slashed future cashflow from operation to achieve a TP of RM3.4.

But why RM3.4 which is quite close to current price? Why not a TP of RM2 or RM4? I can't help to think that RHB needs to generate a Neutral call (looks bad to sustain Buy call again; but a Sell call will be offensive to clients and glove companies who are potential corporate clients). A neutral call means the TP should be close to current price. Hence RM3.4. I very much suspect the TP is worked backward.

The other observation is related to what I’ve commented earlier. It seems that RHB has quietly dropped its dubious logic in earlier reports that
“We expect USD40.00 to be the long-term ASP for nitrile gloves. As the US plans to build its own gloves manufacturing plants, we estimate cost of production to be USD40.00. This should set the long-term global nitrile gloves price. When ASPs drop below USD40.00, US producers will stop producing and, in the long term, ASPs should revert back to USD40.00.”

Now RHB will have to assume long term nitrile ASP < USD40 in order to stay consistent with its latest DCF.

I don’t mean to single out RHB. Most of the broker reports I read also resort to this kind of trick. These reports still provide useful inputs for me. But I will be very careful with their TP and calls.


@oxxxyxxx, thanks for pointing out. I actually didn’t pay attention to the non-glove business. A RM17m net profit per quarter is about 2.6 sen EPS per annum, which will yield some value if multiply by 10X or 15X PE. However as I use the analysts’ consensus revenue, I just have to assume that they have already included this earning stream. I will therefore avoid double counting.

@pjseow, a 75% utilization assumption will only reduce above calculation by 10 to 20 sen. However, the long-term net margin assumption has a much bigger impact. Our assumptions differ where I assume 10% for the entire group based on pre-pandemic median, versus your scenario which breaks down into 8% manufacturing net margin and a much higher distribution margin. Yeah we’ve gone through that discussion so I know where you come from. Thanks.

Emotion runs high in the Supermax forum. I just want to add my two cents here. I don't mind anyone challenging my view, which is why I write here. But lets keep it civilized.

First on the fundamentals. My preferred approach is to work out Supermax normalized earning and multiply with a pre-pandemic historical PE of 15 times.

To get the normalized earnings, I need to start with normalized revenue. One way is to use the latest analyst consensus revenue for FY23 at RM4,776m. But instead of relying on analyst consensus earning, I apply a pre-pandemic median net margin of 10%. Normalized net earning = RM4,776m * 10% = RM477.6m. Divided by 2,589m shares the normalized EPS = 18.4 sen. At 15 times PE the value is RM2.77. Assuming a cost of equity of 12% and normalization happens in 2 years, the present value is RM2.77 / 1.12^2 = RM2.2

Unfortunately, the analysts’ numbers are not very reliable. They have kept on downgrading not only their forecasted net profit but also their forecasted revenue. So I cross check with another approach -- I assume Supermax will reach 48.42 billion annual capacity by FY23 (6 months later than management’s own projection of CY22). I also assume 85% utilization; and further assume normalized 10% net margin on ASP of RM100 (~USD24) per 1,000 pieces, i.e. RM10 net profit per 1,000. Normalized earning = RM10 * 85% * 48.42 million = RM412m, or 15.9 sen. At 15 times PE the value is RM2.38. The present value is RM2.38 / 1.12^2 = RM1.9

Two two approaches above yield RM1.9 and RM 2.2 respectively. On average I assume roughly RM2 per share.

Next I need to consider two other components to the valuation – first the potential dividends in the next two years, and then the current excess cash.

The earnings in the next two years are highly uncertain. It depends on how fast ASP may decline. If I use analysts’ consensus EPS, I get (142-111) + 80 + 44 = 155 sen, or a PV of 138 sen. Assuming overseas expansion doesn't happen, Supermax will not need to preserve further cash. Then two years earnings can be 100% distributed, i.e. at RM1.4 per share. But to be prudent, I also use the most bearish analyst projection, which gives a PV of 64 sen earning, or about RM0.6 with 100% payout. The mid-point of RM1.4 and RM0.6 is about RM1. This is the second component in the valuation.

Lastly it depends on whether the current cash should be added to the valuation. Current net cash is RM3,675m. But RM1,390m has to be deducted for capacity expansion, and another RM648m set aside for net tax liabilities, leaving RM1,637m or 63 sen per share. But I prefer not to take excess cash at full value in valuation. A 50% discount yield about RM0.3 per share.

So based on my valuation the projected value should be about RM2 + RM1 + RM0.3 = about RM3.3 per share, which is roughly at current share price.

But the range of uncertainty is large. For example, the value could be much larger if the normalized net margin is higher than the historical median of 10% (some believe that Supermax has fundamentally changed its business model which gives it a margin far higher than in the past). At the opposite end, normalization may arrive much faster than the 2-year time horizon that I've assumed competition may be more intense; and a CBP ban over labor issue may happen.

Nonetheless for me RM3.3 +/- a range is roughly the value

A short note on the technical side. Most people can see that glove stocks have been on the downtrend. They also say don’t catch the falling knife. But I feel that the share price is poised for a rebound. For example, I look for signs of opposite trends in the price chart versus RSI chart. Price chart is still trending downwards, but RSI (I use the default 14 days) is unmistakably trending upwards, forming a bottom divergence (底背驰). Even for those who believe the general trend is still downward, there could be some opportunity for short term rebound.

Anyway, as I have a long horizon, I’m not too bothered on the technical side. Most importantly the price has entered my comfort zone. But I must say I still like Harta more.

A more bullish industry growth forecast can be found on Page 89 of Top Glove Hong Kong listing document
https://www1.hkexnews.hk/app/sehk/2021/103230/documents/sehk21022601984.pdf

Frost & Sullivan says “It is expected that the sales volume and revenue of the glove industry will reach 1,285.1 billion pieces and US$24,900.4 million in 2025, representing CAGRs of 15.9% and 19.1%, respectively, from 2019 to 2025.”

To summarize, we have
1. Grandview Research that projects 9.2% CAGR from 2020 to 2028
2. MARGMA that projects 12% t0 15% annual growth after the pandemic
3. Frost and Sullivan that projects 19.1% CAGR from 2019 to 2025.

@akun, thanks for sharing the summary of Grandview Research on disposable gloves market. I reproduce the link below.
https://www.grandviewresearch.com/industry-analysis/disposable-gloves-market

I note different organizations give very different projections. Grandview Research projects that the disposable gloves market, consisting mainly of natural rubber, nitrile, vinyl and a few other types of gloves, has a market size of US$10.17 billion in 2020. It is forecasted to grow to US$14.87 billion by 2028. The CAGR is 9.2%.

The first thing I note is the growth of $10.17 billion to $14.87 billion over an 8-year period represents a CAGR of only 4.9% instead of 9.2%. May be the meaning of “market size” is not the same as “revenue”. Still it’s confusing.

Another point is recently MARGMA President MARGMA president Dr Supramaniam Shanmugam said ““Post pandemic, we think, demand for gloves will still grow more than pre-Covid-19 rates, with an estimated annual growth of between 12% and 15%, compared with an annual growth of 8% to 10% before Covid-19.”.

https://www.theedgemarkets.com/article/margma-says-glove-demand-expected-continue-being-robust-until-2q2022

In other words, MARGMA is more bullish than Grandview by projecting 12% to 15% growth even after the pandemic. Grandview only projects 9.2% from 2020 to 2028, which cover both pandemic (higher growth) and post pandemic (lower growth) period.

It’s unclear to me how credible is Grandview Research. However, MARGMA could also be biased given its close tie with the industry.

Nonetheless, it’s beneficial to read a diverse range of opinions out there. Thanks for the sharing.

Last Sat The Edge ran an article with the title “Bank Rakyat’s continued reliance on personal financing raises questions”. It talks about the space of personal financing which could provide useful info to RCE Capital shareholders.

I summarize the key points as below:

1. Bank Rakyat has a personal financing portfolio of RM59 billion, making up the 76% of total financing portfolio of RM78 billion.
2. For comparison, the size of Malaysian personal financing/ loan is RM104 billion. (RCE Capital’s portfolio is only RM1.7 billion)
3. Gross impaired financing is 2.12% (total portfolio). Compare against RCE Capital GIL at 4.0%
4. A BNM study in 2018 showed that Malaysian civil servants spend more than half their monthly salaries repaying debts compared with one-third for average borrowers.
5. Personal financing amounted to 34% of civil servants’ total debt as opposed to national level of 15%

@wsb_investor, yes you're right. I recall limyuwei once said Allianz almost doesn't own equity in its shareholder fund. The equity holdings are for policyholders of Par, ILF and ULF.

@magic01

I just checked. Allianz Life insurance held 2.644 million shares of KPower as of 14 Oct 2020.
After adjusting for split, KPower share price was around RM0.8 per share as of Oct 2020. We can safely assume that Allianz acquired the share at a lower cost. KPower actually rose from RM0.2 in Oct 2019 (Allianz was not in the Top 30 list then) to a height of RM2.8 in Jan 2021.

The current share price is RM1. Assuming Allianz did not top up any shares at higher price after Oct 2020, it should still sit at a paper profit.

But even if Allianz chased KPower all the way to RM2.8 (I think unlikely), the paper loss is at most at a few million RM. How does it compare to Allianz investment portfolio?

As shown in Page 18 of Annual Report, its total portfolio (including general insurance) is RM18.7 billion. Of this total only RM2.6 billion is invested in quoted equities securities and unit trust. The KPower investment is likely to be less than RM10 million. This is less than 0.5% of its equity portfolio, or 0.05% of total portfolio. Any gain or loss from KPower will be very small.

It's also not clear to me whether part of the KPower investment is actually owned by Allianz clients through ILP. That mean the impact to Allianz is even smaller?

Allianz does not publish the embedded value (EV) of its life business. However every year it discloses its New Business Value (NBV).

May I know whether I can get a rough EV by adding up all the NBV announced in the past?

What additional assumptions must I apply to make the estimate more realistic?

No doubt the Delta variant is more contagious, and more deadly too. The UK 7-day average daily confirmed cases have been rising for about a month.

But for perspective, current number of daily confirmed cases in UK is 13 per 100,000. At the peak of January it was 89 per 100,000.

https://ourworldindata.org/grapher/uk-daily-covid-cases-7day-average

Take a look at India, the source country of Delta variant. The trend is unmistakably pointing downward. Daily confirmed cases in India has declined by over 80% since the peak in early May.

https://ourworldindata.org/coronavirus/country/india

Sad to note some people still think the longer Covid pandemic is around, the better for their glove share price. Relax. The demand for gloves will continue to grow even after the pandemic.

It looks like the article that “42 Taiwanese died in the last 4 days after taking AZ vaccination” is also shared on TG forum. Let me share my perspective.

Actually it’s not about AZ vaccination. Countries that use other types of vaccine also show similar trend in their published data. So is vaccination the cause of death? We can make some educated guess based on mortuary statistics.

The Taiwan annual death rate is 8 per 1,000 population, i.e. 0.8%.
https://www.macrotrends.net/countries/TWN/taiwan/death-rate

Taiwan population is about 24 million.
https://en.wikipedia.org/wiki/Demographics_of_Taiwan

That means every year about 24 million * 0.8% = 192,000 population, or everyday about 526 are expected to die from various causes (but mostly health related).

So far about a million Taiwanese population has received at least 1 dose.
https://ourworldindata.org/covid-vaccinations?country=TWN

On average, among that one million vaccinated population, it can be expected that everyday 1/24 * 526 = 22 person will pass away, with or without vaccination! Over a course of 4 days the number grows to 88. Compare this number against the newspaper headline of 42 deaths.

Besides, higher death rate among the vaccinated group may be expected since early stage vaccination focuses on the elderly.

We can’t rule out that in a few cases vaccination may trigger deaths. However, at a higher level, the statistics has clearly shown no anomaly of excess death. The after-vaccination death rate is within the range of normal death rate.

@UPlanet, you shared an article that 42 Taiwanese died in the last 4 days after taking AZ vaccination.

Actually it’s not about AZ vaccination. Countries that use other types of vaccine also show similar trend in their published data. So is vaccination the cause of death? We can make some educated guess based on mortuary statistics.

The Taiwan annual death rate is 8 per 1,000 population, i.e. 0.8%.
https://www.macrotrends.net/countries/TWN/taiwan/death-rate

Taiwan population is about 24 million.
https://en.wikipedia.org/wiki/Demographics_of_Taiwan

That means every year about 24 million * 0.8% = 192,000 population, or everyday about 526 are expected to die from various causes (but mostly health related).

So far about a million Taiwanese population has received at least 1 dose.
https://ourworldindata.org/covid-vaccinations?country=TWN

On average, among that one million vaccinated population, it can be expected that everyday 1/24 * 526 = 22 person will pass away, with or without vaccination! Over a course of 4 days the number grows to 88. Compare this number against the newspaper headline of 42 deaths.

Besides, higher death rate among the vaccinated group may be expected since early stage vaccination focuses on the elderly.

We can’t rule out that in a few cases vaccination may trigger deaths. However at a higher level, the statistics has clearly shown no anomaly of excess death. The after vaccination death rate is within the range of normal death rate.

@Papayashot, you're very observant. I didn't notice the different behaviors between CEO and CFO.

Personally I believe in the short term STMB will suffer again just like during MCO1.0. Although motor claim will stay low, STMB has more reliance on credit products sold via bancassurance partners. I guess few people want to buy cars or homes during this period. Showrooms are shut and legal work probably crawl to a halt. The 2nd and 3rd quarter results may not look great. Of course this is a short term consideration.

I also don't like seeing the various company's key principals keep selling their shares. This practice has been going on for several years despite company share price trending higher. It is as if insiders have less confidence than shareholders.

Note 15 (page 182) of 2020 Annual Reports provide details on the share-based payments arrangement. Current scheme was approved in 2013 EGM and would be effective for 10 years.

Year/ Granted shares/ Vested shares/ Outstanding by Year End
2020/ 1.8 million/ 3.6 million/ 5.0 million
2019/ 2.8 million/ 2.6 million/ 7.3 million
2018/ 3.1 million/ 1.0 million/ 7.7 million
2017/ 3.2 million/ 2.2 million/ 6.4 million

However, putting myself in management staffs' position, I probably will also dispose shares to buy cars/ buy house/ meet living expenses, or simply to diversify investment so that not eggs are kept in one basket.

Insider share disposal doesn't mean this company is not a good investment. It's just that key management staffs probably don't see their company share price growing like 3 or 5 times in the next 10 years.

EPF holding is shown in page 113 of 2020 Annual Report. EPF owns both ordinary shares and ICPS.

It’s interesting to see the Big Four practicing different Share Buy Back (SBB) strategies.

Top Glove made headlines in Sep last year with its aggressive SBB. It had since bought about 200 million shares from a price as high as RM8 to the last batch at RM5.78 in Feb 2021. But it stopped its SBB after that even though price has become much lower (RM4.6 now).

Kossan had limited SBB from Dec to Mar. Only 6 million shares were purchased in total.

Supermax bought over 100m shares mostly last year. It distributed some Treasury shares at year end. Last SBB was Jan at price above RM6. But like Top Glove, it stopped SBB even though price has now dropped to RM3.6.

Harta only began its SBB in April this year. It has bought about 7m shares ranging from RM8.X to RM10.X

It seems that the SBBs at Harta and Kossan are more rational, and they are more aligned with long term shareholders’ interest. Either a company management doesn't do SBB; or when they buy, they should buy at lower prices. SBB at high price but stops when price goes south, while the company is still cash rich, looks either opportunistic or short-sighted.

Hi kywoo, I certainly agree RCE Capital is well managed.

I cited the PB and ROE valuation method not because I value it on liquidation basis, but because it’s commonly used for most financial stocks. Maybank and RHB analysts also use this method to derive their TPs for RCE.

Thanks for sharing your investment journey on RCE. I could imagine adding this stock if I have not owned it as I feel it’s fairly valued (though you think it’s still undervalued). But like you, I’ve accumulated before Covid-19, though not anymore now given it’s one of my top holdings and I want to avoid too much concentration.

@pjseow, yes, I recalled. I don't dispute what you've read on the management presentation.

But as mentioned before, it's best to double confirm whether such fat margin enjoyed by middlemen is mostly due to the pandemic, or is it a norm prior to the pandemic? If it's a norm, then presumably this dealer who marked up USD30 could have an important contribution to the value chain. If so it will cost Supermax money to replicate its role.

Pure rent-seeking, politically connected middlemen may be common in third world countries. But it’s hard to imagine they could have existed for so long in the US, especially a few years ago while Supermax struggled with very thin trading profit. Of course, can’t rule out this was indeed the case. Just that I think it's prudent to get management confirmation.

On the theory of takeover.

Supermax’s net cash is only 36% of market cap. There is actually a long list of companies where its liquid assets exceed 100% of market cap. Star Media, ICAP, Insas, Dutaland, to name just a few. Not to mention some even have nice real estate thrown in for free. In theory an acquirer who gain control and liquidate and share the handsome profits with all shareholders. However, in practice all these years minority shareholders only see the cash on company reports.

@Tonee, almost every controlling shareholder in Bursa holds their majority stake via a Sdn. Bhd. Everyone of them is a potential seller.

Next is a question directed to those who have followed Supermax for a long time.

Beside the number, the management quality and the corporate governance are also very important. I believe the substantial shareholder Stanley Thai calls the shot in Supermax, even though he is no longer with the board after relinquished his MD position in 2017 (as a result of being convicted on insider trading but was overturned in 2020). As replacement his daughter and nephew have been appointed to the board. His brother in law is also there. They also hold management position.

Those who follow would also know, coincidentally (or is it?), Stanley publicly supported the opposition during GE13. Stanley had to apologize to Najib in Apr 2018, just before the historic GE14 election, for “wrongly” supporting the opposition during GE13. Coincidentally, Supermax then chairperson Rafidah Aziz also resigned in Apr 2018 (and coincidentally Rafidah was also the chairperson at Air Asia, and recall Tony Fernandes painted his plane blue)

I mentioned all these old stories because I think Stanley Thai is certainly a colorful person. It also took some guts to publicly support the opposition during the days of unbroken BN rule.

But in the context of investment, how do Stanley (and his team at Supermax) measure up to peers like Tan Sri Lim at TG or the Kuan family at Harta?

What is your view?

@pjseow,

Most of your assumptions seem reasonable. The only thing is, as discussed before, I’m uncertain on the how Supermax could defend a distribution net margin of 25% for the long term. Recall pre-pandemic trading segment margin was very thin and sometimes negative.

Glove industry data aside, we can also check out industries with similar characteristics. Supermax is in an own brand business with own production of fast moving, large volume consumable products. I’ve earlier mentioned that in Malaysia successful consumer product companies like Nestle, Carlsberg and Heineken have low double digit net margin. In US, consumer product leaders like P&G, Mondelez and Kimberly Clark have 14%, 11% & 9% median margin respectively over the last decade. I also check out B. Braun, a Germany company which provides hospital supplies (it has plant in Penang). BBraun only has a 2% to 6% net margin over the last 5 years.

I would be cautious to assign a very high long term net margin without in depth understanding on company’s newly established business moats (on top of cutting out middlemen). You mentioned management has guided 30% to 40% long term net margin. You may want to ask management during AGM why their competitive advantages cannot be easily replicated by rivals. What have stopped Supermax itself from implementing those changes earlier, at a time when they were struggling with occasional loss in trading.

Whether it’s 30% to 40%, or 23.75%, or the historical median of 10% net margin, this is no doubt the key to its stock valuation. But there are also a few other fine-tunings that I can think of.

One consideration is to convert into present value. By the company plan, Supermax will reach 48b annual capacity by the end of 2022 (representing a CAGR of capacity expansion at 36%). After applying a normalized PE to the earning by end of 2022, the value has to be discounted based on an assumed cost of equity (in my view 10% or even higher).

During this interim period, shareholders will receive dividends. The dividends can be estimated based on projected EPS and assumed payout of 30% to 50% (sample assumptions from several analysts). Again the dividend has to be converted to present value.

At the end of the day, I have no doubt all these assumptions will turn out very differently from the actual. But by adopting a range of possibilities we get a diverse range of fair value estimates to better guide decision.

Having said that, as the share price continues to slides, at some point value would emerge. Not doubt about that. The current downtrend notwithstanding.

The article today lists differing views between the interviewed fund managers and analysts. It also lists 10 analysts call per stock.

Top Glove (3 buys), Harta (6 buys), Supermax (8 buy), Kossan (6 buys). Supermax seems to be relatively more popular. But for direct comparison take note that Top Glove calls would be most updated (1 week old), but others may not. Also beware of using analyst TP as majority tend to follow rather than lead market price.

https://www.theedgemarkets.com/article/fund-managers-turn-cautious-about-glove-counters-even-analysts-maintain-buy-call

@newway, yeah your estimate is the same as mine. Top Glove shipment to NA dropped by ~2.5b in 3Q as compared to 2Q

If the 2.5b is added back, the shipment to capacity ratio of 3Q should be 18.1*4/ 100 = 72%, which is about the same as 2Q (70%).

On the expectation of the lifting of CBP ban. I read a few analyst reports, with views ranging from CBP ban to be lifted soon to as late as year end. So the middle ground is CBP ban will be lifted one quarter later. Assuming that has been factored in the price right now, I then try to calculate the financial upside of immediate lifting.

Assume extra shipment back to NA within one quarter is 2.5b pieces as last quarter. Further assume ASP per 1,000 is RM267 and PAT margin is 50% just like last quarter. The extra PAT = 2.5m * 267 * 50% = RM334m. Dividing by 8 billion shares the extra EPS contribution is only about 4 sen.

Of course, the above calculations are based on simplified assumptions. The ASP and margin for NA should be higher, although that could be offset by the softening ASP trend. Besides it does not consider the effect of extra revenue & profits from regions outside NA in last Q since TG may have shifted some shipments there.

Anyway I would agree that while the fundamental impacts of immediate lifting of CBP ban isn’t great (4 sen in EPS), there could be a very strong sentiment boost worth many times more.

@pjseoew, you may refer to page 6 of Top Glove 3QFY21 briefing deck.

https://www.topglove.com/App_ClientFile/7ff8cb3f-fbf6-42e7-81da-6db6a0ab2ef4/Assets/corporate_calendar/3QFY21%20Briefing%20slides%20090621._Website.pdf

Sales quantity for 3QFY20 is 17.1 billion
Sales quantity for 2QFY21 is 16.3 billion
Sales quantity for 3QFY21 is 15.6 billion (therefore -9% YoY, -4% QoQ)

The quantity decline is against expanded capacities of 78.7b by 3QFY20, 93b by 2QFY21 and 100b by 3QFY21, implying ratio of shipment to quarter end capacity as below
3QFY20 is 17.1*4/ 78.7 = 87%
2QFY21 is 16.3*4/ 93 = 70%
3QFY21 is 15.6*4/ 100 = 62%

However, this ratio is only an approximation to production capacity utilization. Actual utilization during last quarter could be slightly higher if Top Glove has built and held some FG as stock (its inventory value has increased).

Regarding The Star article shared by FortuneBlooming, I agree with the title that other glove makers would fare better than Top Glove which was hit by the CBP ban.

Top Glove situation is unique. It only shipped 15.6 billion pieces in Mar to May quarter, despite capacity reaching 100 billion pieces. This is equivalent to about 62% capacity utilization (or probably close to 70% if we assume all of the RM346m inventory increased was finished goods held in warehouse awaiting shipment; and that could contribute handsomely in the next Q if CBP ban is lifted soon).

But I want to draw attention to two points highlighted in the article which would be relevant to other glove stocks:

First, AMInvest mentions “higher number of order cancellations”. Since last year, thanks to some good sharing from the forum, we understand that customers would place some form of deposits or pre-payment. This pre-payment (can be found on Balance Sheet) currently stands at about RM900 million for Top Glove, slightly over RM1 billion for Supermax, and slightly below RM900 million for Harta. It is supposed to be a good indicator of the order pipeline. But such indicator may be less useful now if high number of order cancellations are allowed to happened. While not sure about the details, business common sense dictates that such deposits would not be forfeited in order to preserve relationship. May be the deposits would be used to contra against outstanding invoices or serve as pre-payment for future orders. Of course, this is just a guess. Bottomline is order pipeline can be rather flexible.

Second is “glove lead times, formerly six months long in the past quarter, have since subsided to 30 to 50 days”. In fact, if I recall correctly, at one point last year order lead time was reported to be as long as one whole year! The drastic reduction in order lead time shows how volatile the situation could be. It may also indicate double ordering by some customers during the desperate time last year (as reportedly also happened in the semiconductor industry).

The reasons I’m citing these is not say the situation is bad. Afterall, profits are still near historical height and supernormal profit would still last for a while. I’m just sharing my observations and lessons I learn from glove stocks -- that some bullish indicators which made into media headlines (like the order lead time) could turn bearish really fast. Investors need to process such info with care.

@pjseow, take note from the Nomura report, management plans to return to its 30% OEM model after demand has normalized.

"Management said that before COVID-19 started, 40% of its volume went to own
distribution centres under OBM, followed by 30% to independent distributors in over
165 countries under OBM and 30% to OEM customers. This changed post March
2020 with 58% going to own distribution centres, 40% to independent distributors in
over 165 countries under OBM and 2% to OEM customers, especially to the big US
distributors. Once demand starts to normalise management expects this mix to return
to pre-COVID-19 status."

I’ll watch out for these few factors:

1. Revenue growth – can expect little growth given the loan book growth has slowed considerably. The management has turned cautious even before the pandemic. But I agree as it’s better to be too cautious than overly aggressive in this personal loan business

2. Asset quality – continues to hold up very well. It’s helped by the job security of its customer base (civil servant) where repayment is mostly through salary deduction.

3. Interest rate – It has benefited from lower funding cost in the past few years during the interest rate down cycle. But 10Y Malaysian government bond yield has recovered from the 2.5% low last year to current 3.2%. How fast will it rise in future, and how might it affect future cost of borrowing and therefore the net margin?

4. Valuation – This is a contentious topic. Some investors here feel that it’s undervalued. Based on Maybank’s projection of FY22E book value of RM2.37, currently RCE trades at 1.24X PB against expected FY22E ROE of 15.1%.

Instead of comparing against valuation of another lender like Aeon Credit (which stirs up a different kind of disagreement with AEONCR investors), I look up at BIMB, which also offers a lot of personal loan to civil servants (although also other banking, stock brokerage and insurance thrown in).

AM Invest projects 2021E BV at RM4.08, which is 0.84X PB, against FY21E ROE of 12.8%. In this not perfect comparison, RCE Capital doesn’t look too much undervalued in a relative sense. Besides, BIMB being a larger cap stock and more liquid could attract larger funds, and therefore in theory should enjoy higher valuation.

Anyway, like it or not, the share price is determined by the market. For me it's good enough to just hold and collect dividends regardless of share price movement, as long as fundamentals remain sound.

Published in The Edge today. "Positive views on RCE Capital maintained, despite FMCO"

I just caught up with the reading of The Edge last week. There was an article by Andrew Sheng, a former central banker, with the title is “What is the best asset allocation strategy”.

Interesting read besides the usual stuff on financial asset allocation. To quote a piece of his thought:

“The principle of strategic asset allocation is much more universal in application, because every day or minute, we are allocating our previous time (another asset) to decide what to do with the short term (the urgent or mundane) or the long term (important but difficult)."

@pjseow, thanks. Yes. I’ve read the prospect section too. It’ll be good if the management can provide more info. Were such questions raised in previous AGM? I fail to locate their past AGM minutes. I feel that if Supermax could emulate Top Glove in investor communication, it could help to attract more serious long term investors.

But I understand you valuation approach --> that current net cash + very near term profits + long term normal profit at average PE is close to/ exceed current share price; even though I don't subscribe to adding cash directly in valuation (also need to subtract net tax liabilities, among others)

Hi Ben, thanks for your clarification.

Just to elaborate on my view on supply-demand dynamic. When I estimate that supply-demand could balance by 2022-23, I still believes in the continuous growing demand driven by pandemic needs, strategic stockpiling and structurally higher demand. I don’t have hard figures. Just that I note glove is not a finite resource. It takes 12m to 18m to build factories and commission production. If ASP continues to offer decent profits, old and new players alike will continue to expand. At some point supply growth could catch up and exceed demand growth. My gut feeling is 3 to 4 years after the pandemic, which is 2022-23, should have offered sufficient catch up time.

@pjseow, that’s a very good information. Thanks for the sharing.

It’ll be interesting to know the details of this direct-to-consumer business.

For industrial scale users, like hospital chains, I suppose personalized selling is required. Does it mean Supermax has already beefed up its sales team on the ground? Supermax does not disclose its number of employee (not to mentioned foreign employees) in its annual reports so it’s hard to guess.

As for mass market users, I wonder whether it now has greater sales through online platforms like Amazon? If yes, has it started doing so before the pandemic knowing that it could possibly capture a larger slice of profits. If not, what held it back then?

In fact many brand companies, even in Malaysia, have adopted this route in recent years. But brands also see the challenge where power is shifted to the platforms. Platforms have more data and know the buying habits of consumers than the brands companies themselves. Platform algorithm could easily channel customers to rival brands except for products with strong brand loyalty.

Of course, brands could build their online platforms (with help from Shopify for example). But as a consumer myself, I only shop for high price items from the brand platforms. For cheaper stuffs it’s far convenient to shop on Lazada or Shopee; and I often pick the cheapest as long as the sellers have reasonably good rating. The ease of price comparison on platforms destroys pricing power and erodes margin.

Anyway, this is a question rather than opinion. I have no idea on how Supermax operates this direct consumer business. It will be good to learn more in order to make some educated projections.

@Pjseow, thanks for your reply. You’ve certainly done a lot of study on this company.

I get your point that the company has shifted from previously 70% ODM + 30% OEM to the current 98% ODM + 2% OEM, and within the ODM it has increased own distribution from 40% to 58%.

However, the reason I feel that there has been no fundamental shift in Supermax business model is pre pandemic it was already 70% ODM. During this period, with even the 70% ODM business, it only managed a median profit margin of about 10%. The margin was actually lower if compared to some pure OEM peers.

I appreciate your peer comparison showing the explosive growth in profits by Supermax during the initial period of the pandemic. I could be wrong, but this could be what happened last year:

Pre-pandemic, both manufacturing and distribution made normal profit. Acute shortages during the pandemic inflated margin at both sides, may be even more at the distribution side. Supermax management was nimble and made a fast decision to cut OEM and enlarged their pie in distribution. In that way they captured both sides of the profits.

If my conjecture is right, we should see Supermax profit margin normalizes faster than its peers in the coming quarters. Of course, I might be wrong, then Supermax profit margin should stay at a higher plateau. If it’s indeed 30% to 40% long term net margin as management has claimed, I agree that would make current share price very attractive.

In the meantime, I would like to draw attention to the segment reporting in the annual reports. For 2020, trading segment has a positive segment results of RM224 million on a total revenue of RM1,480m, or a segment margin of 15%. Given Supermax year end is in Jun, we can expect much higher margin in 2021 Annual Report given the explosive profits subsequently.

However, the trading segment during pre-pandemic years show much poorer result:
Year Segment Revenue Segment Results Segment Margin
2019 RM874m RM1m loss 0%
2018 RM825m RM21m profit 2%
2017 RM575m RM20m loss -3%

As can be seen, before the pandemic the distribution side had a slim margin at best. Perhaps it was weighed down by the high cost in sales, marketing and distribution. Afterall I can imagine it’s not cheap to successfully defend expand brands in rich countries. That I believe was the reason Supermax was previously 70% rather than 100% into ODM. The 30% from the OEM side provided cushion and stability.

So the crux of the question is, how much of the extra profit from ODM is derived from glove shortages during pandemic, and how much extra profit could be truly attributed to the structural change in the ODM business which will persist far into the future.

@pjseow, thanks for your reply.

I now understand that you have work out the PAT for manufacturing and distribution separately, and later combine them to derive at the net margin of 23%.

However, despite the management now emphasizing on its “dual income sources” –consisting of manufacturing and distribution, there is no fundamental change in its business model. For example, in the 2019 (i.e., pre-pandemic) Annual Report, the segment reporting has already separated manufacturing and trading as distinct activities, contributing to RM1.4b and RM0.9b revenue respectively before elimination.

The pre-pandemic median profit margin of about 10% during last decade is based on a business model fundamentally not very different from today. It may be just management now giving this "dual income model" a higher emphasis to signify their OBM advantage during the pandemic period.

If there is no fundamental shift in business model, the higher profit margin may not be justified.

@Ben,

Lastly, “most of the value is contained in earnings that have already been achieved (net cash) and will be achieved within the next 2 quarters”
--> Don’t agree.

Supermax has a net cash of of RM3,675m. At today closing of RM3.82, the net cash of RM1.42 is about 37% of the share price.

But I don’t agree directly adding that net cash to the valuation. And I’m not “really keen on making gloves seem like a bad investment”, as you’ve claimed.

First, its increased in future revenue depends on its expansion plan to bring capacity from 26.2 billion to 48.4 billion. The management states that it would cost RM1.39 billion.

Next, it owed a net RM648 million of tax to the government.

After deducting these two factors, the net cash is reduced to RM1,637 million, or 63 sen per share, or 16% of current share price.

But the more important point is should net cash be just added directly to stock valuation. If the market values stock this way, there wouldn’t be so many companies in Bursa selling below their net cash level, and for long term basis!

There are also quite a number of relatively sound companies with net cash at 30%, 40% or even higher selling at seemingly low valuation. I just quote two examples.

First is Magni Tech which you’re familiar with. Net cash RM334 million, or 77 sen per share, or 32% of current share price. Magni has high cash level for many years, consistent and growing dividends, but the market values it an average 8X forward PE over the last 5 years.

Next example is HLIND. It has a net cash of RM1,582m, or RM4.82 per share, or 47% of current share price. It has strong and growing cash generating capabilities, growing dividend, but market values it at a 10.5X forward PE over the last 5 years.

(Just in case anyone claim that Supermax is valued at even lower forward PE right now, note the above two examples refer to normalized forward PE. Supermax would have a much higher forward PE once earning is normalized).

So is a net cash company any good? Of course financially it’s more stable and better than a net debt, especially a high net debt companies with uncertain cashflow. But the market does not simply translate net cash into valuation. At least not in the multiple examples I've witnessed over the years.

Lastly, I reckon valuation is also a personal choice. I respect your assumptions and decision to add Supermax net cash into valuation. As for me, by not adding to the calculation, I get different answer.

You may be more optimistic about the future and derive a higher valuation, and me the other way round. But I respect this difference in opinions. But don’t assume that I’m “really keen on making gloves seem like a bad investment”. That implies ulterior motive on my part. It leaves a bad taste to an otherwise very healthy and stimulating discussion.

(Part 4, final)