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?