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AFW364 FINANCIAL STATEMENT ANALYSIS

Semester I
Academic Session 2012/2013
Group Assignment:-

Analysis of
Lecturer:

Datin Dr. Joriah Muhammad

Chuah Ting Chia


Ng Kin Yung
Ng Yi Ning
Ng Zhei Ying
Nor Hashimah Binti Yahaya

Acknowledgement
First and foremost, we would like to thank Datin Dr. Joriah Muhammad for leading and
guiding us in completing our project. Datin Dr. Joriah Muhammad dedicated so much of
her precious time to help all of us. Also, we are thankful that Datin Dr. Joriah
Muhammad readily helps us with supplying useful hints and solutions to our questions.
Otherwise, we would have used up more time than needed to complete our project.
Furthermore, we have learnt much in completing this project. In order to sharpen
Universiti Sains Malaysia undergraduates ability, Datin Dr. Joriah Muhammad has set
the requirements of the group project accordingly. Nevertheless, it dawns on us to work
more diligently to be up to scratch. Therefore, we would like to thank Datin Dr. Joriah
Muhammad again.
Finally, thanks to Datin Dr. Joriah Muhammad for urging us to know more about
financial statements analysis. Moreover, we thank our entire group members for their
precious time and for making every endeavor and contribution to get the group project
completed.

2 AFW364 Financial Statement Analysis | Top Glove

AFW364 FINANCIAL STATEMENT ANALYSIS - Top Glove Project Outline


1.0

Executive Summary

2.0

Description of Companys Background


2.1
Company Background
2.2
Board of Directors
`

6
7

3.0

SWOT Analysis

10

4.0

Common-Size Analysis
4.1
Vertical Analysis of Income Statement
4.2
Horizontal Analysis of Income Statement

15
16

5.0

Accounting Issues

17

6.0

Financial Health of Company


6.1
Trend Analysis of Income Statement
6.2
Forecasted Pro-Forma Income Statement
6.3
Trend Analysis of Balance Sheet
6.4
Forecasted Pro-Forma Balance Sheet
6.5
Trend Analysis of Cash Flow Statement
6.6
Forecasted Pro-Forma Cash Flow Statement
6.7
Risks Associated With Forecasting

20
21
22
24
26
29
32

Equity Evaluation
7.1
Dividend Discount Model (DDM)
7.2
Method of Comparables
7.3
Explanation for the Differences in Valuation

33
36
38

8.0

Assumptions/ Limitations/ Obstacles

40

9.0

Conclusion

43

7.0

Reference

3 AFW364 Financial Statement Analysis | Top Glove

1.0

Executive Summary

This study paper focuses on the analysis of Top Glove, a public listed company on the
Main Market of the Kuala Lumpur Stock Exchange. Top Glove also the world's largest
rubber glove manufacturer exports to approximately 1,000 customers in over 185
countries. In order to analyze Top Glove, many details of the business have to be taken
into consideration from the firms business model, the management, the firms product
to its financial statements. This study paper is mainly for the use of outside investor and
thus Top Gloves business model or business strategy serves as the starting point for
the analysis. Equipped with the knowledge of the business, an analyst then transform it
into a valuation and trading strategy.
This paper start off with a description of Top Gloves background as an analyst must
know the business she is analyzing. As the adage goes, one does not buy a stock, one
buy a business. When buying a business, know the business. Value depends on the
business model, the strategy. Good firm can be bad buys. Price is what you pay, value
is what you get. All of these point to the importance of knowing a business before
proceeding with the technical or the quantitative part of equity valuation. SWOT analysis
is then carried out to further enhance the understanding of Top Gloves business
strategy, the sector it is in and its business environment. This paper then proceeds with
the preparation of common-size income statement. Common-size analysis is used for
cross-sectional comparison which is the comparison to other firms with the elimination
of the effect of size.

4 AFW364 Financial Statement Analysis | Top Glove

Accounting issues were laid out before trend analyses of Top Gloves financial
statements are prepared. Trend analysis enables Top Gloves financial statements to be
compared over time. Trend analyses of financial statements also serve as the
foundation for the preparation of Top Gloves pro-forma financial statements. The
analysis of Top Glove is completed with the two valuation models which are the
Dividend Discount Model (DDM) and the Method of Comparables. This paper arrived
with a value indicating that Top Gloves share price is overpriced. Hence, potential
investors are advised to have a short position in the stock and urged to be on the
lookout for share price reversal before proceeding with the purchase of Top Gloves
shares.

5 AFW364 Financial Statement Analysis | Top Glove

2.0

Description of Company

2.1

Company Background

Top Glove was established in 1991 with only one factory and three production lines and
has grown by leaps and bounds to become the worlds largest rubber glove
manufacturer. At 2th November 2012, this company already has 23 factories and 458
production lines with 40 billion total production capacities per year. Their manufacturing
facilities spread across Malaysia, Thailand and China. It was listed in Bursa Malaysia on
27 March 2001. Top Glove Corporation Berhad listing was successfully promoted from
the Second Board to the Main Market of the Kuala Lumpur Stock Exchange within a
short period of time. Besides that, Top Glove collaboration with government agencies
and ministries is to ensure that they follow the latest development in rubber research
technology.
This company vision is We Strive To Be the Worlds Leading Manufacturer With
Excellent Quality Glove Product And Services That Enrich And Protect Human Lives
while their mission is To Be a World Class Glove Manufacturer Providing Top Quality
Products With Excellent Services Through Continuous Improvement And Innovation.

6 AFW364 Financial Statement Analysis | Top Glove

2.2

Board of Directors

1. Tan Sri Dato Sri Lim Wee-Chai (Chairman)


Aged 53, a Malaysian citizen, was appointed as the Chairman of Top Glove Corporation
BHD on 4th September 2000. He is also the founder of Top Glove Group of Companies
which was established in 1991. He has strongly practiced the business direction of To
Produce Consistently High Quality Gloves at Efficient Low cost and to remind all staff
and workers to ensure continuous improvement in Quality and Efficiency in line with
Company tagline of Top Glove, Top Quality, Top Efficiency, Good Health, Safety First
and Be Honest.

2. Tan Sri Dato Seri Arshad Bin Ayub (Independent Non-Executive Director)
Aged 83, a Malaysian citizen, was appointed as an Independent Non- Executive
Director of Top Glove Corporation Bhd on 4th September 2000. Arshad also sits on the
Board of Directors of several public listed companies such as Chairman of Malayan
Flours Mills Bhd and Director of Kulim (M) Berhad.

3. Tan Sri Dato Dr Lin See Yan (Independent Non-Executive Director)


Aged 72, a Malaysian citizen, was appointed as an Independent Non- Executive
Director of Top Glove Corporation Bhd on 16th June 2010. He sits on the Board of
several public listed companies in Malaysia including Fraser &Neave Holdings Berhad,
JobStreet Corporation Berhad and others.

7 AFW364 Financial Statement Analysis | Top Glove

4. Lee Kim Meow (Managing Director)


Aged 52, a Malaysian citizen, was appointed as an Executive Director on 15th October
2003 and subsequently, as the Managing Director on 7th April 2009. He joined Top
Glove in 1997 as the General Manager in charge of the marketing and promotion of the
Company s products to more than 180 countries worldwide.

5. Puan Sri Tong Siew Bee (Executive Director)


Aged 53, a Malaysian citizen, was appointed as an Executive Director of Top Glove
Corporation Bhd on 4th September 2000. Prior to the listing of the Company, she was
the Director and the Co-Founder of Top Glove Sdn Bhd. She is the spouse of Tan Sri
Lim Wee Chai.

6. Lim Hooi Sin (Executive Director)


Aged 49, a Malaysian citizen, was appointed as an Executive Director of Top Glove
Corporation Bhd on 4th September 2000. He is the brother of Tan Sri Lim Wee Chai.

7. Sekarajasekaran A/L Arasaratnam (Independent Non-Executive Director)


Aged 83, a Malaysian citizen, was appointed as an Independent Non-Executive Director
of Top Glove Corporation Bhd on 4th September 2000.

8. Lim Cheong Guan (Executive Director)


Aged 46, a Malaysian citizen and was appointed as an Executive Director of Top Glove
Corporation Bhd on 31th August 2006. He joined the Company as Group Financial

8 AFW364 Financial Statement Analysis | Top Glove

Controller in 2005. He is responsible for the accounting, treasury, corporate finance and
investor relations of Top Glove Group of Companies.

9. Lim Han Boon (Independent Non-Executive Director)


Aged 54, a Malaysian citizen and was appointed to the Board of Directors as an
Independent Non-Executive Director of Top Glove Corporation Bhd on 21th February
2011.

9 AFW364 Financial Statement Analysis | Top Glove

3.0

SWOT Analysis

3.1

Strengths

3.1.1 Continuous Capacity Expansion


Top Glove has undertaken a rapid and ongoing expansion of its capacity to become the
worlds largest rubber glove manufacturer. The company has increased its total
production capacity to 40 billion pieces of gloves per year. It is expanding its capacity
through creating a total of 23 glove factories across countries with 17 located in
Malaysia, 4 in Thailand (2 latex concentrate plant) and 2 in China. Recently, it has
completed the acquisition of PT Agro Pratama Sejahtera for some 30.77-ha of green
field rubber plantation land in Indonesia. The company continues to work on expanding
the business through strategic investments. Having the foresight to expand capacity
enables it to capture the growth in the rubber glove industry.

3.1.2 Huge Customer Base


Over the years, Top Glove has been building its customer base around the world. To
date, it has 1,000 customers in over 185 countries with no single biggest customer
constituting more than 4% of the revenue. This has helped cushion any negative effects
from the world economic downturn.

3.1.3 Own Rubber Plantation


Top Glove is the first rubber glove maker to move upstream by acquiring its own rubber
plantation land to ensure a consistent supply of latex which accounts for up to 60% of its
production costs. Top Glove has completed its acquisition of PT Agro, which owns a

10 AFW364 Financial Statement Analysis | Top Glove

30.77-ha rubber plantation land in South Sumatera, Indonesia. This move of rubber
planting will mitigate some risk. If latex prices are high, Top Glove would benefit from it
because it will have in-house supply of rubber to smoothen its earnings. When latex
prices are low, it will also continue to benefit, as it can buy from the open market or use
its own supply.

3.1.4 High Product Quality


To ensure high product quality, the company has implemented a comprehensive quality
assurance system. All in-house inspection and testing are conducted in accordance with
international product quality standards such as ASTM, EN, ISO and NBR standards. It
also conducts quality control of all incoming raw materials, in-process parameters, up till
the outgoing finished products. Besides that, the quality control exercise has been
extended to include inspection and testing of raw materials at the suppliers premise.
This practice ensures only high and acceptable quality raw materials are delivered to
Top Glove. In addition, it has automated many processes to reduce human error and for
greater consistency of product quality.

3.1.5 Competitive Pricing


Top Gloves focus on being an OEM (Original Equipment Manufacturer) since the early
days has allowed greater economies of scale which translate to more competitive
pricing. The consistency of the product quality coupled with competitive pricing has
enabled the company to penetrate new markets and steadily gain market share.

11 AFW364 Financial Statement Analysis | Top Glove

3.2

Weaknesses

3.2.1 Rubber Planting


Rubber planting is a high capital expenditure game with a long gestation period. With
the acquisition of PT Agro Pratama Sejahtera for green field rubber plantation land in
Indonesia, the estimated investment cost is around RM450million, over next 13 years
including land, planting, maintenance cost up to maturity and facilities. It is time
consuming as rubber tree has 6 years gestation period and progressive planting over 8
years. With full development, it will take 13 years.

3.3

Opportunities

3.3.1 Increasing global demand


The demand for both natural rubber and nitrile gloves will continue to grow as gloves
are deemed basic necessities, especially in the medical industry. The global demand for
both natural rubber and nitrile gloves is projected to rise at a rate of 8 to 10% per annum,
with still many opportunities in the emerging markets where glove usage is low.

3.3.2 Healthcare surge


Top Glove will be the beneficiary of the worldwide trend of increasing expenditure on
and demand for healthcare. Governments and individuals spend more on the medical
sector, underpinned by factors such as increasing of ageing population, greater
healthcare and hygiene awareness and existing of health regulations. Furthermore, its
importance as a protective agent is compounded during the global health scares like
SARS and H1N1.

12 AFW364 Financial Statement Analysis | Top Glove

3.4

Threats

3.4.1 Volatility in materials costs


Latex is the major cost component for rubber glove manufacturers and makes up 60%
of Top Gloves costs. In view of this, latex price volatility will affect the groups costs and
margins. The price of latex price has rebounded due to the intervention by the
International Tripartite Rubber Council (ITRC). This upward trend of latexs price will
decrease the profit by increasing the production costs. On a positive note, Top Glove is
able to pass on about 70-80% of the cost increase to its customers.

3.4.2 Minimum Wage Concerns


The government is going to implement the minimum wage policy by setting the
minimum wage at RM900 per month for employees in the peninsula and RM800 for
workers in Sarawak, Sabah and the Federal Territory of Labuan. This would decrease
net profit of Top glove as the wage costs would increase due to the huge amount of
staffs, with about 11,000 employees.

3.4.3 Oversupply
There is a 10% to 20% oversupply in year 2011 due to the high demand over the past
one to two years and so much capacity being added by Top Glove and its competitors.
However, Top Glove expects the current oversupply of rubber gloves in the global
market to be absorbed over the next one to three years since the demand for gloves is
still growing at 8% to 10% every year.

13 AFW364 Financial Statement Analysis | Top Glove

3.4.4 Currency Exposure


Given that most of the Top Gloves revenue comes from the export market, the
strengthening of the ringgit will be the negative market condition. An adverse foreign
exchange movement, in particular, the weakening of US dollar will certainly have a
negative impact on the groups sales.

14 AFW364 Financial Statement Analysis | Top Glove

4.0

Common Size Analysis

4.1

Vertical Analysis
Top Glove Corporation Berhad
Income Statement
For the Financial Year Ended August 31
2011

2010

RM000
Sales revenue

2009

RM000

RM000

2,053,916

100%

2,079,432

100%

1,529,077

100%

(1,818,767)

88.55%

(1,640,550)

78.89%

(1,155,975)

75.60%

Gross profit

235,149

11.45%

438,882

21.11%

373,102

24.40%

Other operating
income

26,689

1.30%

10,372

0.50%

6,979

0.46%

Distribution and
selling costs

(67,121)

3.27%

(66,008)

3.17%

(95,484)

6.24%

Administrative and
general expenses

(60,495)

2.95%

(80,987)

3.89%

(53,091)

3.47%

(242)

0.01%

(639)

0.03%

0.00%

Operating profit

133,980

6.52%

301,620

14.50%

231,506

15.14%

Interest expense

10,573

0.51%

4,288

0.21%

(8,530)

0.56%

Share of (loss) /
profit of associate

917

0.05%

(947)

0.05%

(984)

0.06%

Profit before tax

145,470

7.08%

304,961

14.67%

221,992

14.52%

Income tax
expense

(30,338)

1.48%

(54,550)

2.62%

(53,992)

3.53%

Profit for the year

115,132

5.61%

250,411

12.04%

168,070

10.99%

Cost of goods sold

Finance cost

15 AFW364 Financial Statement Analysis | Top Glove

4.2

Horizontal Analysis
Top Glove Corporation Berhad
Income Statement
For the Financial Year Ended August 31
2011

2010

2009

2011

2010

2009

RM000

RM000

RM000

2,053,916

2,079,432

1,529,077

134%

136%

100%

(1,818,767)

(1,640,550)

(1,155,975)

157%

142%

100%

Gross profit

235,149

438,882

373,102

63%

118%

100%

Other operating
income

26,689

10,372

6,979

382%

149%

100%

Distribution and
selling costs

(67,121)

(66,008)

(95,484)

70%

69%

100%

Administrative and
general expenses

(60,495)

(80,987)

(53,091)

114%

153%

100%

(242)

(639)

0%

0%

0%

Operating profit

133,980

301,620

231,506

58%

130%

100%

Interest expense

10,573

4,288

(8,530)

124%

50%

100%

Share of (loss) /
profit of associate

917

(947)

(984)

93%

96%

100%

Profit before tax

145,470

304,961

221,992

66%

137%

100%

Income tax
expense

(30,338)

(54,550)

(53,992)

56%

101%

100%

Profit for the year

115,132

250,411

168,070

69%

149%

100%

Sales revenue
Cost of goods sold

Finance cost

16 AFW364 Financial Statement Analysis | Top Glove

5.0

Accounting Issues

5.1

Basis of Preparation

The financial statements of Top Glove Corporation Berhad have been prepared in
accordance with Financial Reporting Standards and the Companies Act, 1965 in
Malaysia. Nevertheless, at the beginning of the current financial year, the Group and the
Company adopted new and revised FRS.
Besides, the financial statements have been prepared on the historical cost basis
5.2

Property, Plant and Equipment

All items of property, plant and equipment of Top Glove Corporation Berhad are initially
recorded at cost, in which the prices of assets on the balance sheet are based on their
nominal or original costs when acquired by the company.
Although historical accounting method is less subject to manipulation of figures by
managers and is useful for control purposes, it has flaws in times of inflation. The
validity of historical accounting rests on the assumption that the currency in which
transactions are recorded remains stable, i.e. its purchasing power remains the same
over a period of time. Another main point with regards to inflation is rise in prices for an
asset. An asset purchased at a point of time may be expensive in the future. The
traditional accounting principles record all assets at an original cost and continue to use
these historic figures throughout the asset's life, while economists make a more
intelligible assumption that money has a time-value attached to it. The economist's
approach is broadly embraced in the corporate finance model whose objective is

17 AFW364 Financial Statement Analysis | Top Glove

centered on value creation for the shareholders. Thus, assets of the company may be
undervalued over time by using historical accounting method. In addition, effects of
inflation may not be the same for all the companies in the market and historical cost
accounts become almost unhelpful when comparing corporate performance.
5.3

Depreciation of Property, Plant and Equipment

Depreciation is computed on a straight-line basis over the estimated useful lives of the
assets as follows:

Buildings: 20 to 50 years

Plant and equipment: 10 years

Other assets: 5 to 10 years

Freehold land has an unlimited useful life and therefore is not depreciated. Assets under
construction are not depreciated as these assets are not yet available for use.
The straight-line method offers simplicity. Since the same amount is written off each
year, profits for future years can be determined easily. In other words, as profits grow,
depreciation costs remain the same. This allows us to make financial forecasts for
several years. However, this method has several drawbacks. There are some problems
with using straight line depreciation to determine the worth of assets since the assets
may not depreciate at the same rate every year. Most pieces of office equipment,
machinery and other items purchased do not perform exactly the same each year. As
assets age they become less efficient. Repair costs usually increase over time. Straightline depreciation does not account for the loss of efficiency or the increase in repair
expenses over the years and is, therefore, not as suitable for costly assets such as

18 AFW364 Financial Statement Analysis | Top Glove

plant and equipment. The functional life span of some assets cannot clearly be
estimated. Therefore, the straight-line depreciation method is not the best method given
that the useful life of an asset is often unpredictable. Besides, assets are often shown
with inflated values since the assets may have lost the greatest amount of value in the
first year or two. While this may become an issue if the assets are being used to secure
credit, in the end a decision will need to be made whether predictability in accounting or
creditworthiness is the more important focus.

19 AFW364 Financial Statement Analysis | Top Glove

6.0 Financial Health of Top Glove Corporation Berhad


6.1 Trend Analysis of Income Statement
2009

Revenue

(RM'000)
1,529,077

(-)Cost of goods sold


Gross profit

% Change

2010

% Change

2011

Average
(%)
17.38

35.99

(RM'000)
2079,432

-1.23

(RM'000)
2,053,916

1155975

41.92

1,640,550

10.86

1818767

26.43

373,102

17.63

438,882

-46.42

235,149

-14.39

(+)Other operating income

6,979

110.05

14,660

154.17

37,262

132.11

(-)Distribution & selling costs

53,091

24.33

66,008

16.86

67,121

20.59

(-)Administrative & general expenses

95,484

-15.18

80,987

-25.3

60,495

-20.24

Operating profit

231,506

32.41

306,547

-52.77

144,795

-10.18

(-)Interest expense

8,530

-92.51

639

-62.13

242

-77.32

(+)Share of results of associate

-984

3.76

-947

196.83

917

100.29

Profit before tax

221,992

37.37

304,961

-52.29

145,470

-7.46

(-)Income tax expense

53,922

-1.16

54,550

-44.38

30,338

-22.77

Net income

168,070

48.99

250,411

-54.02

115,132

-2.52

169,133

44.99

245,231

-53.88

113,091

-4.45

-1,063

587.3

5,180

-60.59

2,041

263.36

168,070

48.99

250,411

-50.02

115,132

-0.52

Profit attributable to:


Equity holders of the Company
(+)Minority interests

20 AFW364 Financial Statement Analysis | Top Glove

6.2 Forecasted Pro-Forma Income Statement


2011(A)

2012(E)

2013(E)

2014(E)

(RM'000)

(RM'000)

(RM'000)

(RM'000)

Revenue

2,053,916

2,410,887

2,829,899

3,321,735

(-)Cost of goods sold

1,818,767

2,209,576

2,657,557

3,174,193

Gross profit

235,149

201,311

172,342

147,542

Other operating income

37,262

86,489

200,749

465,959

(-)Distribution & selling costs

67,121

80,941

97,607

117,704

(-)Administrative & general expenses

60,495

48,251

38,485

30,696

Operating profit

144,795

158,608

236,999

465,101

(-)Interest expense

242

55

12

Share of results of associate

917

1,837

3,679

7,368

Profit before tax

145,470

160,390

240,666

472,466

(-)Income tax expense

30,338

23,430

18,095

13,975

Net income

115,132

136,960

222,571

458,491

113,091

129,544

195,624

360,575

2,041

7,416

26,947

97,916

115,132

136,960

222,571

458,491

Profit attributable to:


Equity holders of the Company
Minority interests

21 AFW364 Financial Statement Analysis | Top Glove

6.3 Trend Analysis of Balance Sheet

Assets
Non-current assets
Property, plant and equipment
Land use rights
Investments in associate
Investment securities
Goodwill

Current assets
Inventories
Trade and other receivables
Tax recoverable
Investment securities
Derivative assets
Cash and bank balances
Total assets
Equity and liabilities
Non-current liabilities
Borrowings
Deferred tax liabilities

2009
(RM'000)

%
Change

2010
(RM'000)

%
Change

2011
(RM'000)

Average
(%)

564,380
14,200
9,366
12,853
20,113
620,912

2.92
53.10
-46.02
-98.87
1.13

580,867
21,741
5,056
145
20,113
627,922

13.74
-9.81
39.22
0.69
12.69

660,692
19,608
7,039
146
20,113
707,598

8.33
21.65
-3.40
-49.09
6.91

119,053
206,596
185,848
511,497
1,132,409

40.70
29.54
41.48
45.47
21.16

167,511
267,617
5,473
40,557
262,930
744,088
1,372,010

4.79
-0.44
141.70
167.55
-43.42
-3.85
3.72

175,532
266,445
13,228
108,512
2,954
148,760
715,431
1,423,029

22.75
14.55
70.85
83.78
-0.97
20.81
12.44

8,960
33,413
42,373

-66.24
2.83
-11.77

3,025
34,360
37,385

-5.75
29.20
26.37

2,851
44,393
47,244

-36.00
16.02
7.30

22 AFW364 Financial Statement Analysis | Top Glove

Current liabilities
Loans and borrowings
Trade payables
Other payables
Tax payable
Dividends payable

Equity attributable to equity


holders of the company
Share capital
Share premium
Treasury shares
Other reserves
Retained earnings
Shareholders' equity
Minority interests
Total equity
Total equity and liabilities

11,573
92,430
104,554
14,721
20,781
244,059

-95.33
13.72
7.70
-10.57

541
105,116
112,602
218,259

-70.98
0.80
9.50
5.11

157
105,955
123,300
229,412

-83.16
7.26
8.60
-2.73

151,879
243,677
-38,427
21,964
445,420
824,513
21,464
845,977
1,132,409

103.50
-30.00
-38.76
34.57
32.50
11.18
31.96
21.16

309,081
170,563
13,451
599,407
1,092,502
23,864
1,116,366
1,372,010

0.06
0.71
10.26
4.43
2.68
2.96
2.69
3.72

309,256
171,780
14,831
625,936
1,121,803
24,570
1,146,373
1,423,029

51.78
-14.65
-14.25
19.50
17.59
7.07
17.33
12.44

23 AFW364 Financial Statement Analysis | Top Glove

6.4 Forecasted Pro-Forma Balance Sheet

Assets
Non-current assets
Property, plant and equipment
Land use rights
Investments in associate
Investment securities
Goodwill

Current assets
Inventories
Trade and other receivables
Tax recoverable
Investment securities
Derivative assets
Cash and bank balances
Total assets
Equity and liabilities
Non-current liabilities
Borrowings
Deferred tax liabilities

2011(A)
(RM'000)

2012(E)
(RM'000)

2013(E)
(RM'000)

2014(E)
(RM'000)

660,692
19,608
7,039
146
20,113
707,598

715,728
23,853
6,800
74
20,113
766,568

775,348
29,017
6,772
38
20,113
831,288

839,934
35,300
6,542
19
20,113
901,908

175,532
266,445
13,228
108,512
2,954
148,760
715,431
1,423,029

215,466
305,213
22,600
199,423
105,082
847,784
1,614,352

264,483
349,621
28,612
366,500
205,703
1,214,919
2.046,207

324,654
400,491
65,969
673,554
554,574
2,019,242
2,921,150

2,851
44,393
47,244

1,825
21,646
23,471

1,168
42,244
43,412

747
69,329
70,076

24 AFW364 Financial Statement Analysis | Top Glove

Current liabilities
Loans and borrowings
Trade payables
Other payables
Tax payable
Dividends payable

Equity attributable to equity


holders of the company
Share capital
Share premium
Treasury shares
Other reserves
Retained earnings
Shareholders' equity
Minority interests
Total equity
Total equity and liabilities

157
105,955
123,300
229,412

26
83,788
104,045
217,718

4
104,386
127,908
232,298

0.75
264,045.62
291,223.63
555,270

309,256
171,780
14,831
625,936
1,121,803
24,570
1,146,373
1,423,029

469,389
146,614
12,718
747,994
1,376,715
26,307
1,403,022
1,614,352

712,438
125,135
10,905
893,852
1,742,330
28,167
1,770,497
2.046,207

1,081,339
106,803
9,351
1,068,153
2,265,646
30,158
2,295,804
2,921,150

25 AFW364 Financial Statement Analysis | Top Glove

6.5 Trend Analysis of Cash Flow Statement

Operating activities
Profit before tax
Adjustments for :
Gross dividend
Depreciation and amortization
Property, plant and equipment
Amortization of land use rights
Gain on disposal of property, plant and equipment
Property, plant and equipment written off
Reversal of provision for doubtful debts
Share options granted under ESOS
Provision for doubtful debts
Unrealized foreign exchange loss
Impairment on investment in associate
Share of results of associate
Net fair value gains on derivative
Net fair value gains on available-for-sale
Negative goodwill written off
Reversal of impairment loss
Finance costs
Interest income
Total adjustments
Operating cash flows before changes in
working capital

2009
(RM'000)

%
Change

2010
(RM'000)

%
Change

2011
(RM'000)

Average
(%)

221,992

37.37

304,961

-52.29

145,470

-7.46

56,744
218
-366
10,198
-17
13,461
0
-416
0
984
0
0
0
0
8,530
-2,233

36.83
4.13
131.97
-98.84
-100
-26.23

4.26
-1.32
71.14
261.02
0
-100
-100
-36.97
-98.36
-196.83

-92.51
92.03

58,834
227
-849
118
0
9,930
14
13,763
2,800
947
0
0
0
0
639
-4,288

87,103

-5.7

309,095

25.24

276.88
-3.76

26 AFW364 Financial Statement Analysis | Top Glove

-62.13
146.57

61,343
224
-245
426
0
0
0
8,675
46
-917
-1,737
-1,057
-1,767
-397
242
-10,573

20.55
1.41
101.55
81.09
-50
63.12
-50
119.96
-49.18
100.29
0
0
0
0
77.32
119.3

82,135

-33.93

54,263

19.82

387,096

-48.4

199,733

-11.58

Changes in working capital


Increase in inventories
Increase in receivables
Increase/(decrease) in payables
Total changes in working capital
Cash flows from/(used in) operation
Interest paid
Income taxes paid
Net cash flows from/(used in) operating
activities

Cash flows from investing activities


Purchase of property, plant and equipment
Additional land use rights
Purchase of other investments
Interest received
Dividends income from subsidiaries
Proceeds from disposal of property, plant and
equipment
Additional investment in an associate
Issuance of share capital to minority shareholders
of a subsidiary
Net cash inflow on acquisition of a subsidiary
Net cash flows (used in)/from investing
activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares

38,713
22,411
9,000
70,124
379,219
-8,530
-38,851

-225.17
-418.63
130.02
241.41
-24.07
-92.51
89.95

-48,458
-71,409
20,702
-99,165
287,931
-639
-73,797

-87.61
-94.96
-49.73
-100.81
-30.35
-62.13
-61.82

-6,004
-3,597
10,407
806
200,539
-242
-28,176

-156.39
-256.795
40.15
70.03
-27.21
-77.32
14.07

331,838

-35.66

213,495

-19.38

172,121

-27.52

-67,229
-2,773
-12,708
2,233
0

-32.15
-193.54
11.35
92.03

-88,840
-8,140
-27,849
4,288
0

-59.02
-100
47.82
146.57

-141,273
-68,267
10,573
0

-45.59
-146.77
29.59
119.3

2,895

-2.87

2,812
-

-37.69

1,752
-336

-20.28

823
-

-100

0
-

0
624

-0.5

-76,759

-53.37

-117,729

62.27

-196,927

4.45

11,365

175.81

31,346

-96.76

1,015

39.53

27 AFW364 Financial Statement Analysis | Top Glove

Share issue expenses


Proceeds from sale of treasury shares
Dividend paid on ordinary shares
Dividend paid to minority shareholders
Repayment of obligations under finance leases
Repayment of bank loans
Repayment of medium term notes
Decrease in short term borrowings
Net cash used in financing activities
Net increase/(decrease) in cash and cash
equivalents
Effects of foreign exchange rate changes
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year (Note
20)

0
0
-32,389
0
-1,181
-48,809
-58,500
-56,889
-186,403

-91.55
-100
-38.77

95.51
-93.44
-80.34
-96.12
-92.91

-71
81,575
-109,098
0
-53
-3,204
-11,500
-2,210
-13,215

68,676
-3,298
120,470

20.2
65.83
54.27

185,848

41.48

117.35

28 AFW364 Financial Statement Analysis | Top Glove

62.27
-79.46
-100
-100
562.3

-6
0
-86,575
-1,280
-20
-658
0
0
-87,524

-45.78
-0.5
39.29
78.89
-86.45
-90.17
-98.06
234.69

82,551
-5,469
185,848

-236.07
-66.36
41.48

-112,330
-1,840
262,930

107.94
-0.27
47.88

262,930

-43.42

148,760

-0.97

6.6 Forecasted Pro-forma Cash Flow Statement


2011(A)
(RM'000)

2012(E)
(RM'000)

2013(E)
(RM'000)

2014(E)
(RM'000)

145,470

160,390

240,666

472,466

61,343
224
-245
426
0
0
0
8,675
46
-917
-1,737
-1,057
-1,767
-397
242
-10,573

73,949
227
-494
771
0
0
0
19082
23
-1837
0
0
0
0
429
-23,187

89,146
230
-995
1,397
0
0
0
48,951
12
-3679
0
0
0
0
761
-50,848

107,465
233
-2,006
2,529
0
0
0
92,153
6
-7368
0
0
0
0
1,349
-111,510

Total adjustments

54,263

68,963

84,975

82,851

Operating cash flows before changes in working capital

199,733

229,353

325,641

555,317

Operating activities
Profit before tax
Adjustments for :
Gross dividend
Depreciation and amortization
Property, plant and equipment
Amortization of land use rights
Gain on disposal of property, plant and equipment
Property, plant and equipment written off
Reversal of provision for doubtful debts
Share options granted under ESOS
Provision for doubtful debts
Unrealized foreign exchange loss
Impairment on investment in associate
Share of results of associate
Net fair value gains on derivative
Net fair value gains on available-for-sale
Negative goodwill written off
Reversal of impairment loss
Finance costs
Interest income

29 AFW364 Financial Statement Analysis | Top Glove

Changes in working capital


Increase in inventories
Increase in receivables
Increase/(decrease) in payables
Total changes in working capital
Cash flows from/(used in) operation
Interest paid
Income taxes paid
Net cash flows from/(used in) operating activities

-6,004
-3,597
10,407
806
200,539
-242
-28,176
172,121

3,386
5,639
14,585
20,560
249,913
-55
-32,140
217,718

-1,909
-8,843
20,441
9,689
335,530
-12
36,663
372,181

1,077
13,866
28,647
43590
598907
-3
41,821
640,725

Cash flows from investing activities


Purchase of property, plant and equipment
Additional land use rights
Purchase of other investments
Interest received
Dividends income from subsidiaries
Proceeds from disposal of property, plant and equipment
Additional investment in an associate
Issuance of share capital to minority shareholders of a subsidiary
Net cash inflow on acquisition of a subsidiary
Net cash flows (used in)/from investing activities

-141,273
-68,267
10,573
0
1,752
-336
0
624
-196,927

-76,867
0
-88,467
23,186
0
1,397
0
0
0
-140,751

-41,823
0
-114,645
50,848
0
1,113
0
0
0
-104,507

-22,756
0
-148,568
111,510
0
888
0
0
0
-59,814

1,015
-6
0

1,416
-3
0

1,976
-2
0

2,757
-1
0

Cash flows from financing activities


Proceeds from issuance of ordinary shares
Share issue expenses
Proceeds from sale of treasury shares

30 AFW364 Financial Statement Analysis | Top Glove

Dividend paid on ordinary shares


Dividend paid to minority shareholders
Repayment of obligations under finance leases
Repayment of bank loans
Repayment of medium term notes
Decrease in short term borrowings
Net cash used in financing activities

-86,575
-1,280
-20
-658
0
0
-87,524

-120,590
0
-36
-89
0
0
-119,302

-167,970
0
-64
-12
0
0
-166,072

-233,965
0
-114
-2
0
0
-231,325

Net increase/(decrease) in cash and cash equivalents


Effects of foreign exchange rate changes
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year (Note 20)

-112,330
-1,840
262,930
148,760

-42,335
-1,343
148,760
105,082

101,602
-981
105,082
205,703

349,586
-715
205,703
554,574

*Note: A- Actual, E-Expected

31 AFW364 Financial Statement Analysis | Top Glove

6.7

Risks Associated with Forecasting

Several assumptions are made in order to best forecast the financial performance of
Top Glove for the next three years. Notwithstanding, forecasting the financial
performance of a Top Glove is still associated with several risk and constrained by
certain limitations. In actuality, Top Glove is subject to different kinds of risks. For
instances, inflation, interest rate risk, foreign currency risk, government policy and so
forth.
In the extreme case, inflation, interest rate or/and foreign currency might fluctuate
considerably and unpredictably, which in turn affect Top Gloves future performance.
For example, foreign currency declines would reduce Top Glove importation costs and
Top Glove is therefore able to yield more revenue with lower expenses. Subsequently,
the forecasted financial statement would be underestimated and turns out to be
inaccurate.
Moreover, forecasting encounters with accuracy issues. The financial statement of Top
Glove is expected to grow constantly in next the three years. Ironically, one of the risks
associated with forecasting here is that financial statement might either rise or decline
independently with the trends analysis. In other words, it would grow in an unexpected
way that rejects the appropriateness of financial forecasting.
Nonetheless, it is impossible to eliminate all the risks associated with forecasting as
undiversified risks influence not only Top Glove but the entire of the financial market.
Therefore, forecasting is contingent to the purposes and needs of the studies or
research with regard the assumptions made.

32 AFW364 Financial Statement Analysis | Top Glove

7.0

Equity Evaluation

7.1

Dividend Discount Model (DDM)

The dividend discount model calculates the intrinsic value of a firm based on the
dividends the company pays its shareholders. The justification for using dividends to
value a company is that dividends represent the actual cash flows going to the
shareholder, thus valuing the present value of these cash flows should give the value
for how much the shares should be worth.
In the valuation of Top Glove by using dividend discount model, the discount rate is
computed as below:
Market Risk Premium
The risk free rate is assumed to be the rate of return a 10-year Malaysian Government
Securities at the closing of the reporting period. Besides, the market risk premium is the
rate that stands for the market return in excess of the return earned on risk free asset. It
is determined as:
Market risk premium = market return - risk free rate.
Risk Free Rate: 3.63% (31 August 2011)
The market risk premium is assumed to be 6.5%.
Top Glove Beta
Beta = 0.81

33 AFW364 Financial Statement Analysis | Top Glove

Required Rate of Return (Discounting Rate)


R = Risk Free rate + Beta (Market Risk Premium)
= 3.63% + 0.81(6.5%)
= 8.895%
Top Gloves Forecasted Future Dividend per Share (DPS)
2012(F)

2013(F)

2014(F)

Dividend(RM000)

120,590

167,970

233,965

Number of shares

938,778

1,424,876

2,162,678

0.13

0.12

0.11

DPS(RM)

With the forecasted DPS as shown above and the assumption of the DPS continues to
grow at a rate of 7% after year 2014, the value of Top Glove can be determined by
using the following equation:
Value of equity = Present value of expected dividend to time T + Present Value of
expected terminal value at T
Or
Value =
* d = expected dividend, g = growth rate, R= require rate of return or discount rate, T =
Period
Value of Top glove =
= RM 5.12 per share
Total Market Value = RM5.12 x 618, 513, 000 shares = RM3, 166, 786, 560

34 AFW364 Financial Statement Analysis | Top Glove

In this method, forecasted dividends per share to 2014 are discounted to present value
at the discount rate of 8.895%. Then the present value of the continuing value is added
to complete the valuation of the firm. With the assumptions, the equity value of Top
Glove is calculated to be RM3, 166, 786, 560 on 618, 513, 000 shares, or RM 5.12 per
share in August 2011.

35 AFW364 Financial Statement Analysis | Top Glove

7.2

Method of Comparables

The Method of Comparables is used to value the Top Glove Corporation Bhd. The
following table lists the annual sales, earnings, and book value of equity for Top Glove
and two of its competitors which are Kossan Rubber Industries Bhd. and Hartalega
Holdings Bhd. The price-to-sales (P/S), price-to-earnings (P/E) and price-to-book (P/B)
ratios for Kossan and Hartalega are based on their market value in August 2011.
Table: Pricing Multiples for Comparable Firms to Top Glove Corporation Bhd
(RM000) in 2011
Company
Kossan Rubber
Industries Bhd
Hartalega Holdings
Bhd
Top Glove
Corporation Bhd
*
***

Sales

Earnings

Book
Value

Market
Value

*
P/S

**
P/E

***
P/B

1,089,969

89,687

496,853

895,255

0.82

9.98

1.80

734,921

190,297

494,444

2,032,284 2.77 10.68

4.11

2,053,916

113,091

1,121,803

**

Top Glove is valued by applying the average of multiples for comparison firms to its
sales, earnings and book values as shown in the table below.

36 AFW364 Financial Statement Analysis | Top Glove

Table: Applying Comparable Firms Multiples to Top Glove Corporation Bhd


(RM000)
Top
Gloves
Number

Average Multiple
for Comparables

Top Gloves
Valuation

Sales

1.80

2,053,916

3,697,049

Earnings

10.33

113,091

1,168,230

Book Value

2.96

1,121,803

3,320,537

Average Valuation

*2,728,605

*Average Valuation=
Top Gloves actual valuation on August 2011 was RM3, 005,973,000 with 618,513,000 shares.

Based on the three multiples, the valuations are averaged to give a value of RM2,
728,605,000 on 618,513,000 shares or RM4.41 per share. In fact, Top Glove was
trading at RM4.86 per share at the time with RM3, 005,973,000 of market value. On the
basis of the average valuation, it says that the stock is expensive.

37 AFW364 Financial Statement Analysis | Top Glove

7.3

Explanation for the Differences in Valuation

In assessing the equity valuation of Top Glove, the value of the company is RM3, 166,
786, 560 by using the Dividend Discount Method (DDM) and it turns to be RM2,
728,605,000 when Method of Comparables used. These results show that there are
slight differences between the two methods.

The differences between the valuations occurs as DDM is a method that attempts to
find the intrinsic or "true" value of the based only on dividends and growth rate for a
single company and not worry about any other companies whereas Method of
Comparables operates by comparing the company in question to other similar
companies. Method of Comparables does not attempt to find the intrinsic value for the
stock like the DDM valuation method; it simply compares the stock's price multiples to a
benchmark to determine if the stock is relatively undervalued or overvalued.

Moreover, Method of Comparables uses present date while DDM requires forecasting of
future cash flows dividends. Method of Comparables method searches and compares
for similar companies which is difficult to do so since no two firms are exactly identical
and firms in the same business can still differ on risk, growth potential and cash flows.

In addition, Method of Comparables is very sensitive to various accounting choices and


alternatives. Different methods of revenue recognition adopted by the company might
distort the multiplier quite badly. DDM does not suffer this shortfall as the company's
dividends are not affected by accounting for revenue for the long term.

38 AFW364 Financial Statement Analysis | Top Glove

In conclusion, no one valuation method is perfect for every situation. However, by


knowing the characteristics of the company, a valuation method that best suits the
situation can be selected. Several valuations should be performed to create a range of
possible values or average all of the valuations into one.

39 AFW364 Financial Statement Analysis | Top Glove

8.0

Assumptions/ Limitations/ Obstacles

This study paper used absolute and relative valuation models, namely the Dividend
Discount Model (DDM) and the Method of Comparables in evaluating Top Glove equity
value. These two methods are parsimonious in that they are relatively straightforward
and they require a few piece of information that is important. These two valuation model
yielded two different values for Top Gloves equity which are RM5.12 per share from
DDM and RM4.41 per share from the Method of Comparables. Different valuation
methods will yield different value but it does not mean that any of the valuation models
is superior to the other. It is advisable to use more than one valuation models when
evaluating a target company so that any shortfall from a particular model can be even
out. Values derived from various valuation models is then computed to obtain an
average value. A valuation model is chosen based on it suitability to the target
companys characteristics. A point to bear in mind is that the value calculated from the
valuation model serves just as a guide or benchmark in comparing with current market
price. It does not mean that the calculated value is the correct value of any particular
equity. It is also recommended that a follow up studies or a continuation studies to be
conducted from this study paper to calculate Top Gloves equity value for future years in
order to determine which model is better for a company with the characteristics of Top
Glove. The model that fits the consistency criterion in which it consistently derives a
value which the market value tends to converge to should be adopted.
In the Method of Comparables or Multiple Comparison Analysis, Kossan Rubber
Industries Bhd and Hartalega Holdings Bhd were chosen as the comparable firms or
comps. A comparable firm is businesses that are of similar size and in the same

40 AFW364 Financial Statement Analysis | Top Glove

industry (rubber glove industry) and that they have product, cash flows, growth potential,
and risk similar to the firm being valued. In Method of Comparables, it is assumed that
the market is efficient in setting prices for the comparable firms. Method of Comparables
is straightforward and easy to implement. However, it also has problems in
implementing. Below are some of the problems that one might encounter when applying
the Method of Comparables:

Identifying comparable firm with the same operating characteristics is difficult.


More and more firm are structured in the form of a conglomerate which makes
such firms difficult to be classified under a particular sector.

Different multiples give different valuations.

Negative denominators can occur. A firm can has negative earnings and thus
has its P/E ratio would be of little significance.

Dividend Discount Method (DDM) was chosen over the Discounted Cash Flow Method
(DCF) because Top Glove has target dividend payout ratio of around 40% of profit
attributable to equity. Thus, Top Glove dividends are relatively easy to forecast. DCF is
best used when a firm has relatively stable, positive and predictable free cash flow.
However, Top Glove does not have a stable cash flow as it is investing a lot of its cash
back to the business in order to generate growth in the future. The discounting rate
used is calculated to be 8.895% using the rate of 10-year Malaysian government
Securities as the risk free rate and a market risk premium of 6.5%. A highly risk averse
investor might choose to has a higher market risk premium. Different discount rate
would yield different value from the model and this can make the value calculated from

41 AFW364 Financial Statement Analysis | Top Glove

the model seems highly speculative. Another shortfall with the DDM is that it ignores the
capital gain component from the payoffs.

42 AFW364 Financial Statement Analysis | Top Glove

9.0

Conclusion

Research shown that analysts have tended to be overwhelmingly positive in their


assessment of the prospects of firms. Barber, Lehavy, McNichols and Trueman (2001)
find that on a scale of 1 (strong buy) to 5 (strong sell), the average recommendation for
5,628 covered firms in 1996 was 2.04. Hence, one must not take positive
recommendations from analyst blindly. Potential investors are suggested to conduct
own research on a particular stock before investing in it. This paper thus serves as a
simple tool for analyzing stocks for potential investors.
This paper derived values of RM5.12 per share from the Dividend Discount Model
(DDM) and RM4.41 per share from the Method of Comparables for Top Glove from
financial data as of 31th August 2011. Top Glove was trading at RM4.86 per share at the
time. On the basis of the average valuation, Top Glove is slightly overpriced. With
reference to this study paper, interested investors of Top Glove are advised to take a
short position on Top Glove and to be on the lookout for price reversal before investing
in Top Glove. Moving forward to 2012, Top Gloves share is trading at RM5.64 as at 30th
November 2012. This market price far exceeds the price we arrived from the two
valuation model. This may due to aggregate investors having a more positive outlook for
Top Glove. Top Glove plans to invest RM3bil over the next 15 years, to, among others,
build 40 new factories. Top Gloves Chairman Tan Sri Lim Wee Chai said the RM3bil
investment would generate estimated export sales revenue of RM75bil for Malaysia.
This may has perceived by the aggregate investors as good news as current
investments may yield profits in the near future and thus the increase in share price.

43 AFW364 Financial Statement Analysis | Top Glove

Once investors have calculated an intrinsic value for a stock, it is advised to be patient
as it may take some time for prices to gravitate to fundamentals.

44 AFW364 Financial Statement Analysis | Top Glove

References
http://www.topglove.com.my/
http://hartalega.com.my/
http://www.kossan.com.my/GloveDivision/main.html
http://www.bursamalaysia.com/market/securities/equities/prices/#/?filter=BS02
http://www.investopedia.com/articles/fundamental-analysis/11/choosing-valuationmethods.asp#ixzz2CJ9ZLw1N
http://www.theedgemalaysia.com/in-the-financial-daily/217353-top-glove-any-day-is-agood-day.html
http://biz.thestar.com.my/news/story.asp?file=/2012/9/26/business/12082019&sec=busi
ness
Financial Statement Analysis and Security Valuation by Stephen H. Penman, 5th
Edition, McGraw Hill, 2011

45 AFW364 Financial Statement Analysis | Top Glove