How to trade successfully in volatile rubber glove stocks?
According to a report from CGS-CIMB Research dated June 11, 2020, Top Glove’s (TOPG) 3QFY8/20 net profit came in at RM347.9m (+366% yoy), bringing its 9MFY8/20 net profit to RM575m (+97.9% yoy).
The research unit says this was within its expectations (42% of its full-year forecast), but above the Bloomberg consensus’ estimates (63% of Bloomberg). This is given CGS-CIMB expectations of stronger qoq and yoy results in 4QFY20.
The company also announced an interim dividend of 10sen/share, within its expectations.
According to the research house, TOPG expects the demand for its gloves to be strong until at least 3QFY8/22. This is given that its order lead time as at Jun 20 has risen by 13-14 months to Jul-Aug 21 (from 10 months at Apr 20).
In addition, it is also seeing an increase in spot orders, with the company planning to allocate 20% of its capacity catering to spot orders (our current estimates input only 10% spot orders) that enjoy higher selling prices (2-3x of recurring orders).
Going forward, the research house expects TOPG to continue recording sequentially-stronger results on a quarterly basis in FY21. This would be premised on: i) higher glove sales, ii) further increase in ASPs, and iii) better economies of scale.
The research house gathers that TOPG plans to gradually raise its ASPs (+30% qoq in 4QFY20 followed by +15.7% qoq in 1QFY22) with the gradual commissioning of new production capacity of 26.6bn by end-4QFY21 (36% growth from capacity of 73.8bn pieces p.a. at end-3QFY20).
Given the in-line results, CGS-CIMB Research says it is making no no changes to its FY20-22F EPS. The research house reiterates its Add call and TP of RM25.00 (pegged to 22x CY21 P/E, +0.5 s.d. above its 5-year mean) are also retained.
The research house says it continue to like TOPG as the key beneficiary of the current favourable supply-demand dynamic in the glove sector due to the Covid-19 outbreak, given that it is the world’s largest glove maker by capacity (78.7bn pieces p.a. currently).
PEG Corporate Finance and Research view:
As has been highlighted previouly, trading-wise, it has been reported that the valuations of glove players on Bursa Malaysia are now quite stretched and may have priced in the potential strong rise in their earnings over the next year.
The strong rise in the share prices could also mean higher risk for traders or investors attempting to take a position in these stocks at this juncture.
Yet, for elite traders, rubber glove counters remained one of the best sectors to trade right now given its thematic theme being in favour now as well as the volatility in the sector.
So how should you trade Top Glove despite knowing that it has risen strongly?
Or should you re-renter and continue to ride the stock uptrend? Or should you avoid the stock completely?
As an elite trader, you should not fear re-entering a stock just because it has gone up much. What you know is to know in advance the correct re-entry level, the optimum stop loss then upon re-entry and the correct position sizing to re-enter.
Using our calculated proprietary algorithm, the answer is not too hard. Based on the level highlighted a few days back, elite traders should have already re-entered rubber glove stocks at the following key levels highlighted then:
These key levels are calculated in advance and elite traders only need to monitor to see whether these levels are breached to initiate their trading action. As for Top Glove, the level to re-enter as highlighted in the table above is RM15.10.
Elite traders only simply need to buy at the earliest one or two bids above RM15.10 (RM15.20) to immediately re-enter the stock and set an optimum stop loss to address the risk of the position.
The next key question is when should you take profit now on Top Glove after getting in early on re-entry and what is the optimum stop loss level to protect your position.
The key levels are given below for all main rubber glove stocks:
Remember that if you don’t know what is your edge in trading and investment over the million of other traders and investors out there, you probably don’t have one.
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