Wednesday, October 19, 2005

Top of ze World...

Being Top so geng kah?

Top Glove just released their quarterly earnings last nite and the local media quickly trumpeted its achievements.

See:
Top Glove


TOP Glove Corp Bhd has recorded a net profit of RM58.1mil for its financial year ended Aug 31, up 47% from a net profit of RM39.5mil reported for the corresponding period last year.

The company posted a pre-tax profit of RM65.75mil on revenue of RM641.8mil for the period, beating the RM634.4mil revenue projected by analysts polled by Reuters stimates.

For the fourth quarter ended Aug 31, the group recorded revenue of RM194.8mil, representing an increase of 58% against revenue of RM123.3mil achieved during the previous corresponding quarter.

Pre-tax profit for the quarter under review increased to RM17.6mil from RM15.2mil a year ago.


Net profit up 47% wor. Terror hor…

However….what puzzles me is… where is ze Moola?

Mana pergi tok?

If i remember correctly, Jason Zweig stated somewhere (cannot remember which page lah) in the Fourth Revised edition of the legendary Benjamin Graham’s book, “The Intelligent Investor”…the best definition of a good business is that the good business generates more cash than it consumes.

The good business is generating more cash of the company’s piggy bank and the company’s piggy bank grows at a healthy pace.

Think about it.

Isn’t this what we want for our investment?

Now if a company keeps growing in size and expanding and expanding….sales is growing lah, net earnings is also growing at a fantastic rate….but then... somehow the end result is not there.. cos the company’s piggy bank is NOT reflecting the excellent result. Yup, company sales are increasing, net profits are increasing BUT cash is depleting. And in some drastic cases, the company’s loans are increasing too.

And this is my current prejudice against Top Glove.

Where is ze Moola?

Top Glove announced it MADE a net profit of 58.1 million for the current fiscal year 2005.

Fantastic! Bravo! Superb!

However.. open the company’s earnings excel file.. and look at the CF worksheet.
Line 41: Cash and cash equivalent at beginning of the year was 16.168 million

Line 43: Cash and cash equivalent at end of end of period was 4.616 million.

Ahem.

4.616 million wor… and according to the company it MADE 58.1 million. Isn’t the company consuming MORE cash than it generates? How? Would u justify Top Glove being a top business?

And Top Glove’s total borrowings now total 154 million. Errr… a year ago… how much ar?

Sooooooooooo despite it’s great sales and net profit growth… it’s bottom-line certainly ain’t too top-looking for me.

Btw…in my opinion, the need to have some sort of understanding of the explosive growth in Top Glove is kinda important.


So far, it looks to me it has been 'quite' prudent in the number of factories it has been adding per year. Yes, adding a new factory per year is indeed aggressive but i think it has not been too aggressive. (tiok boh?) From a management point of view, consideration should be given regarding the ability for Top Glove to manage the growth in its factories. (Layman's view: Buying and managing a business is always manageable, but if u buy 'too much' businesses, then the very obvious issue, is can we manage all these factories?) Yup, the issue of managing and cordination of all factories in a profitable and efficient manner becomes a concern if the company increases the number of factories too fast.

Whereas, the increment in production line should be a much easier task to handle compared to the number of factories. (tiok boh?)

Now one probably ask why all this? Growth in a company is always good however commonsense would tell us that excessive growth might pose some danger too. As such, this is why I am not discounting this issue.

Which is what is happening in Top Glove isn’t it? The company is expanding and expanding and expanding. Buy/adding a new factory here and there… but all these capex comes with a huge borrowing cost… and in me opinion…i the end result just does not justify all these expansions. Take a look at their Thailand and China segmental results. Does it justify all the moola spend expanding into these markets?

How? What say u?

Am I too prejudiced against what Top Glove has achieved so far?

9 comments:

Anonymous said...

Brother,
I do agree with you. No doubt, expansion business strategy in a Plb company is always good. It mean that they already grab more new customer in this field or exist customer also expanding. To maintance new customer account will be difficulty.
In rubber glove industries, being to be global economic scale/low cost producer has to be aggresive expanding productivity . Once they are global low cost producer easily to beaten their rivals by lower their price and increase quality. Besides that, they can easy take any bulk order from international firm - customer.
So don't be particular the growth.

Moola said...

Hi,

Thanks for sharing ur views... :)

Pretty interesting issue isn't it?

In order to achieve the future growth, sometimes it requires the company to sacrifice and spend ze piggy bank moola in order to achieve the desired growth in earnings in the future.

And this ultimately means that the investor has to buy and wait until the company delivers the promised growth.

Is one willing to wait that long?

I guess it all depends on the individual investor, isn't it?

Cheers!

Anonymous said...

Hi brother,
Long time no surf net.
I do agree on what you said.
Sometimes retail investor tend to wait till outcome , may be late to gain more moola in pocket. Since 1st day listing in bursa malaysia, they always deliver their promise (from 2001yr till 2005yr impressive financial report).
Still not enought ... judgement?
What else you want to wait?
Cheers!

Moola said...

Hello,

Perhaps, you might be confused with what i have written. I am actually hardly convinced at all with Top Glove's performance..

Yes, the net profit has been increasing... but do understand such improvement or growth is what u called an engineered growth.

U cannot borrow and borrow and borrow to find new acquisitions to grow the profit line... but i find such business practice(s) to be rather poor. It's simply artificial growth... and if the management is not too prudent in managing the loan issues... this could turn into a major obstacle if and when the business industry faces a downtrend.

Think about it....


ps... u are who ah?

Anonymous said...

Who am i ? U call me "mr.bad" I have been participate your personal forum such as show me txx money. But now no more. Most of ur comment really enlighten me except some .....Anyway,thanks a lot.
For me, i don't feel any doubt /suspect about Top glove performance.
Nowadays we need to agrresive expand our business (build more strong castle moat against rival's attack) but more risk need to encounter. we have no choice to borrow money to set up new factory.
May be i dare to said that their topglove marketing team is very capable and able to grab more sales or customer base.

toglove case is totally different with other story like megan.
Megan is using acqusition method to boost their growth.
Meanwhile, topglove is using set up new factory method to boost their growth.
Think about if they are unable to grab more sales from existing customer / penetrate new market. How come they still able to set up new production line?
Anyway,I do agree with what you say.

Cheers!
Merry Christmas. :)

Anonymous said...

Hi,
Have u participate Sage personal forum ? But need to pay money. It is worthly because most their discussion really enlighten me.
Cheers!
mr bad.

Moola said...

Wishing you a Merry Christmas too!

Cheers!

ichithekiller said...

Aha! Finally someone has "dared" to say something other than "praises" for TOPGLOV. Should have guessed it would be you. Amidst all the "BUY" calls being issued about TOPGLOV and ranting and raving about its growth (including by some other bloggers), I too have been wondering whether things are really as good as they look for TOPGLOV.

Everyone knows competition and rising production costs in the industry have been affecting profit margins, so how come TOPGLOV profit can keep growing and growing? Simple, by using up all available cash and borrowing more to expand relentlessly. Is this a sound strategy in the long run, with decreasing margins and rising interest rates? We'll just have to wait and see. One thing I know though, when the CEO of a company keeps appearing on the covers of magazines and brags about how its the top company in its industry, profit growth damn geng, yadda, yadda ... it usually signals a top for the company's share price. This will be interesting to watch.

/ichithekiller

Moola said...

Hi Itchi,

LOL!!!!

Yeah.. you guessed it right. It had to be me.. :)

ps... your issue on the aggressive promotion of the company is pretty interesting. Cos if the owner of a plc is more interested in promoting the stock rather than running the company's own business.... err... err... errr... How? If you are the minority shareholder, would you be worried?