Sunday, 22 November 2020

WHY TOPGLOV IS DOING A RM1 BILLION SHARE BUYBACK

On 17 November 2020, I got an invitation to buy one of the most valuable stocks in the world. That invitation came from panicky uncles. 


While we - as a team - had dabbled in glove-related plays before, sometimes in the warrants, sometimes in second-tier players, I had specifically waited for the best moment to buy into what is comfortably the safest, and most profitable glove stock. Ever.

And the best time to buy into a stock is when everybody wants to sell. In my years of trading and investing, I know when the absolute best time is : at the bottom of a downtrend, exacerbated by unreasonable panic.

 

That selling panic was due to news of a COVID-19 infection at the company's worker dorms in Klang. 

 

In a somewhat perverse way, sensing that market panic gave me further encouragement to make a fairly substantial commitment to my portfolio.

 

I get panicky when I run out of chili sauce at home. I get panicky when the Lazada parcel does not arrive at the expected time.

 

But I do not panic when the stock market goes nuts, or when a stock falls 10% in mere minutes as TOPGLOV did on the 17th. So I bought some.

 

Conviction in timing, conviction in pricing, and conviction in sizing. 

 

That's the key to making above-average profits.

 

As of market close on November 2020, TOPGLOV closed at RM7.29. And like any other human being, I get anxious and unsure about my portfolio from time to time. Sell or hold? Dump or buy more, even?

 

What I've decided to do is.... nothing. I'll keep this position under lock and key for a while, and commit to an exit only if the stock falls back to a certain price. 

 

At that point I'll still lock in a nice gain; on an annualised basis, it's pretty good. 

 

But behind the recent price movements, there's an interesting angle that I've been contemplating for a while. 

  TOPGLOV's daily price chart in November, up until the 20th

 

It's all these bloody bonkers buybacks. About a billion ringgit worth, to be precise.

 

To be even more precise, RM984.13 million shares bought back since September 2020. It's been buying RM69.9 million worth of shares for many consecutive days in November. Sometimes I lost count.

 

Here are some more fascinating figures. TOPGLOV currently has about 135 million shares held in treasury. That block is worth RM984.66 million based on the last closing price.

So what's going on?

 

THE BUYBACK CLEARLY HAS AN ENDGAME


For the unitiated, the questions are obvious.

 

Why waste money like that lor? So easy spend all that cash like that? Why not go invest in something?

 

These are valid concerns, but we need to scratch below the surface. And for that, we should first know why share buybacks happen. 

 

As of 20 November 2020, TOPGLOV has 135.07 million shares in treasury. It has the authority to buy back up to 10% of its current shares outstanding.

 
If it wants to go nuts and really make an outlandish statement, TOPGLOV can buy back exactly 684,298,533 more shares.


This will cost RM5 billion at current market prices, so OK la, we rule this out at the moment...


   TOPGLOV Share Buyback Statement, Bursa Malaysia filing on 12 November 2020

 

While it is accurate that massive share buybacks can be seen as a bit of virtue signaling by the company, whereby the perception is that the shares are undervalued at current prices, I'd avoid this thinking completely.

 

Companies can do all the buybacks in the world, but if the market sets a different expectation, the shares will still fall.

 

I never buy shares simply because the company is doing share buybacks. That's lazy analysis.

 

I buy shares because I see value, be it from a fundamentals standpoint (which is not very hard with a stock like TOPGLOV) or based on a set of circumstances which may end up being favourable for the stock (call it a sentiment premium, if you want).

 

There are a few things TOPGLOV can do with treasury shares:

 
1) Cancel them, which will improve financial and performance metrics on a per share basis, which also technically make the shares more desirable to purchase (ceteris paribus).

 

2) Resell them at higher prices. Of course this also means they can resell them at lower prices, if the market turns against glovemakers. 


3) Redistribute them to shareholders via a dividend in specie (share dividend, not cash). Shareholders get more equity as a reward, no need to put up a single sen.

 

4) Reward employees via ESOS.

 

5) Re-utilise them in an offer-for-sale, such as in a new listing.

 


It is clear that TOPGLOV is buying back shares at an unheard of rate, and it will likely hit the RM1 billion threshold of shares purchase on Monday, 23 November 2020.

 

It only took them three months. The things you can do when you don't have to pay windfall tax is enviable...


In the list above, 1-4 is par for the course. They are to be expected in any share buyback-type situation.


But No.5 is special, and it's peculiar. My view is simple:

 


As TOPGLOV is buying back shares intensively, at an unheard of rate...

 

The more shares it buys back, the higher likelihood that it will list in Hong Kong

 


This is just an educated guess. But my point is - as a totally biased shareholder - this third listing will be beneficial for existing shareholders. 

 

And just like buying shares at artificially depressed, panic induced prices, timing is important.  

 

Its next quarterly results will be on 9 December 2020. Likely the HK listing question will come up again. 

 

TOPGLOV's next AGM is on 6 January 2021. If the company doesn't clarify beforehand, the buyback explanation will surely come up by this date. It will be seeking a renewed mandate from shareholders for share buybacks, of course. 


In another bit of virtue signaling, the listing plans have been promoted earlier. Management wants this to happen.

Link to article

 
'Diversifying the investor base and provide a larger fundraising platform to support growth' is great. 


'Being present in a more active, more liquid stock exchange' is also good. 


Since the company is cash flow super-rich and is super profitable - and has enough committed for its current expansion plans - the main intent of the new listing should be to raise visibility and to permit the entry of new institutional holders. 

 

Some retail mania in HK would even be beneficial to the SG and MY listed shares, if you understand how sentiment works. 

 

One risk cited by the pundits is that Malaysian entities going for a HK listing have done poorly on a historical basis. This is true, but never have we seen a Malaysian company of TOPGLOV's scale and profile there.


As the biggest glovemaker in the world, the likelihood of a successful listing in Hong Kong is quite high.

Back to the treasury shares.


New share issuances would be dilutive, and  fundraising is not really a priority for the company - did you know they just spent RM1 billion to buy their own shares?

 

TOPGLOV is insanely profitable, and it will be this way for a while. The company has enough funds committed for its expansion plans. It does not need equity markets fundraising, which would be share dilutive. Funds have already been raised from the Sukuk

 

My view is the same as others : should this HK listing go ahead, it will  be an offer-for-sale of existing shares

 

This can come from the treasury holdings as well as a partial stake sale by the major shareholders, including from Lim Wee Chai himself.

Earlier disclosure when TOPGLOV did a secondary listing in Singapore. The third listing could be something like this....

 

Even if it doesn't work out and TOPGLOV decides to cancel the shares, redistribute via share dividend, or resell at higher prices, shareholders still win. It's the kind of asymmetrical trade that I go for.


And if the plans are further ahead of schedule than anybody expected, the listing may happen as soon as Q1 or Q2 next year. 

 

There is no better time to promote and do a third listing when you're currently imputing at least 3-4 more quarters of supernormal profits.

 

There was also no better time than on 17 November to buy (and hold) the shares and see how all this plays out. 

 

Like I said, timing is everything.

Sunday, 8 November 2020

COULD MR DIY HIT RM2.50?

 


In our previous writeups on MRDIY highlighting its challenges and opportunities, we had cited reasons why the IPO is overpriced. Now, we will look at reasons why the IPO is (plausibly) underpriced.

We are not wedded to our pre-existing biases. Given that future outcomes are such fickle things, we always think in probabilities, never absolutes.

Hopefully you won’t be surprised if the stock keeps going up, for the same reasons you won’t be surprised if it suddenly collapses. Considering all probabilities simply provides a better understanding of a stock. It's how we approach everything, from trading strategy to fundamental anaysis. 

At the end of the day,  the market is always right upon closing time, and there is no denying that the current price action has been overwhelmingly positive. 

MRDIY is now the 33rd most valuable company on Bursa Malaysia with a RM12.8 billion market capitalisation as of 7 November 2020. It's firmly in the big leagues, and last Friday it rallied to record highs just after posting solid quarterly earnings growth amid a pandemic. Impressive stuff.

After a 28% gain from the IPO price in just two weeks, it’s worth exploring why it can stay up, since we’ve already explained the reasons why it can go down.

It's very intriguing that two research houses currently have vastly differing views on the stock.

Here's Affin Hwang's rating, which is largely aligned with our own views on saturation and declining same store sales growth:


And then there's UOBKayHian:

To be honest, we have not been so preoccupied with the upside potential before this, owing to our very human biases. So let's look at the glass half full, super-bullish theory.  

A MASSIVELY SUCCESFUL LISTING

As far as we can remember, MRDIY is already the most successful multibillion ringgit Main Market listing since IHH, and that was waaayyyy back in 2012. 

The other major listings, as if they're in a league of their own in utter mediocrity, have faltered, and some have crashed and burned since going public. Among those in this list are FGV, AAX, LCTITAN, and ASTRO. 

So if there’s a once-in-a-decade chance to snag an actual newly-listed blue chip with further growth opportunities in Malaysia, it could be MRDIY. 

Note that IHH was notorious for carrying a ridiculously high  price-to-earning (P/E) ratio for years – the premium was a reflection of their growth aspirations. All things considered, they succeeded in realising that growth.

IHH's financial performance, FY2015-2019, sourced from the 2019 Annual Report


GROWTH + CASH + DIVERSE + RESILIENCE = FAT PREMIUM

For MRDIY, the comparison with another successful growth story – QL Resources – may be warranted. QL attained blue chip status over a span of 4-5 years as its stock more than tripled. It has an intact growth proposition as well as an immensely cash -generative business. 
 
Partly due to these factors, the market continues to assign a large premium on the stock. It has consistently traded at a very high P/E (currently at close to 50 times 2021 earnings based on one estimate). 
 
QL's finely tuned cash machine. From the 2020 Annual Report.

It has these in common with MRDIY, if you really dig the blue sky scenario:

- a growth story

- cash-rich business / fantastic operating cash flows growth

- diversification of business

- resilient/fairly inelastic demand for its products

From MRDIY's 3QFY2020 earnings disclosure

If there's one thing investors go nuts over, it's a blue-chip stock with credible growth avenues. A value stock with growth attached may sound contradictory, but we prefer to look at blue chip status as a reflection of market capitalisation, not so much the stage of the business cycle.

The question essentially boils down to this : how much of a premium is the market willing to assign for a unique, resilient, cash-rich stock during these trying times?


At 50 times FY2019 earnings, MRDIY’s stock would fetch a valuation above RM2.50. 

And if we use UOB’s forward earnings estimates:


As part of this superbull narrative, consider this : the market has been assigning stupid premiums to undeserving companies all year long. It could be due to excess liquidity, excess speculation, the work-from-home boost, and the everything bubble, just to name a few possible reasons.

So how would the market value deserving companies? 


THE LIQUIDITY FACTOR

This is something we had deeply thought about since listing day. The stock is fairly ‘scarce’ in the sense that it is not bogged down by fear-driven selling, except for the first 30 seconds of trading on the day of its debut when it plunged to RM1.50. Buyers at those levels have not stopped smiling since.
 
The 15% free float special allowance is one key reason behind this current scarcity, and sometimes, scarcity brings desirability in ownership. So as shares go up, more buyers come in. The resulting demand then pushes prices higher in a virtuous cycle. 

This relative lack of liquidity in the shares is further exacerbated by locked-in shares held by controlling investors, none of whom would be keen to sell anytime soon. Not only are they riding the current gains, they just recently cashed out, remember? 

For clarity, Bee Family Ltd’s share sale moratorium is six months, Hyptis/Creador is six months (or earlier provided there’s written consent by the joint bookrunners), and Premium Alphabet is three months (or earlier if the same condition was met). 
 
From MRDIY's prospectus

In simple terms, look at this as a liquidity timebomb, in the implausible case that a flood of selling hits the market by these fellas once the share sale moratorium is lifted. That’s about three to six months from now. 

For the hero uncles and Bursa's eternal optimists, there is ample time for upside fluctuations. 
 
At present, as evidenced by the buy-sell queues comprising just a few thousand lots at a time, the stock has appealing liquidity characteristics, in our view. 
 
Look at it this way : 

Scarcity due to low-free float + market chasing the stock  = shares already up 40%

If sentiment remains positive, it could rally further. In an upside scenario, the next feasible target price is anywhere between 2.10 and 2.50, if you really want to stretch it. 

POST-PANDEMIC UPSIDE GOODNESS?

Timing-wise, it can be argued that MRDIY has not reached market saturation upon listing. Perhaps there are several more years until it’s no longer plausible to open DIY stores (by which time they would have a large stable of MR Dollar stores). 

Perhaps’s not listing at saturation point; it’s got that growth story going on, and the company is betting its future on this. As we have already argued, MR Dollar is the real growth driver going forward.
 
This particular point is of course what the promoters wanted people to believe. But as a public-listed entity, there may be some fuel left in the tank.

And lastly, consider this : if the business is doing well to cope with pandemic pressure, imagine how it will do when things normalise eventually?

This future expectation will dictate and determine the valuation of MRDIY's stock. At the moment it's too early to tell whether it will enjoy this scarcity premium indefinitely, but as evidenced by the post-listing rally, some have already plunged in.
 

MAKE UP YOUR OWN MIND

Always analyse all available information before considering a stock. Keep scrutinising the company's fundamentals; they will of course shift in time. 

Consider the stock itself, whether it's technicals interpretation in the chart how it looks from a price-volume analysis standpoint (our specialty).

And just as importantly, consider how the stock would be perceived in the current kind of market environment. 

Between the blue sky and six-feet-under scenarios, the truth lies somewhere in the middle. So be open about changing your mind.

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