MARC Ratings has lowered its rating on TG Excellence Berhad’s RM3.0 billion Perpetual Sukuk Wakalah Programme to A_IS(cg) from A+_IS(cg). TG Excellence is a wholly-owned funding vehicle of Top Glove Corporation Bhd which has provided an irrevocable and unconditional guarantee on the perpetual sukuk programme. The rating action follows the downgrade of Top Glove’s corporate credit rating to AA- from AA. The two-notch rating differential between the corporate credit and perpetual sukuk reflects the subordination of the latter to the parent’s senior unsecured obligations in line with MARC Ratings’ methodology. The ratings outlook has been revised to stable from negative. 

The rating downgrade of Top Glove reflects the slower-than-expected recovery of its business and financial profile as it continues to contend with the lingering headwinds in the global glove industry from overcapacity and the suppressed selling price of gloves. Nonetheless, MARC Ratings notes that there has been some improvement in profitability among Malaysian glove manufacturers following capacity rationalisation and lower energy cost, although this remains substantially below the pre-pandemic level in FY2019.

Top Glove’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) turned positive to RM21.3 million for the first quarter of the financial year ending August 31, 2024 (1QFY2024), from a loss of RM61.6 million in the previous corresponding period. However, EBITDA margin remains low at 4.3% compared to 14% in FY2019, providing thin buffer against potential fluctuations in raw material and energy costs. MARC Ratings also observes that competition from manufacturers in China has remained stiff and will continue to weigh on sales volume and industry margin. On an annualised basis of Top Glove’s sales volume in 1QFY2024, its sales volume for FY2024 would be at about 40% of the pre-pandemic level in FY2019, indicating volume recovery is still at a nascent stage.

MARC Ratings expects Top Glove to continue to benefit from its significant cost management initiatives that involved decommissioning old production lines, temporarily shutting down factories and streamlining its workforce. Sales volume is forecast to be driven by continued restocking activities as customers’ inventories normalise. The rating agency views that low natural gas prices will underpin margin recovery. 

Top Glove has a healthy liquidity position with cash balances of RM1.0 billion that would support operational and financial obligations. Its leverage ratios remain low with adjusted debt-to-equity (DE) and net DE ratios of 0.33x and 0.12x. The group has an outstanding RM1.18 billion perpetual sukuk of which the first call date is on February 27, 2025, and is likely to be refinanced. 

The stable outlook assumes Top Glove’s business and financial performance will continue to improve gradually and it will continue to maintain its healthy liquidity position.

There is no immediate upside to the current rating given the prevailing challenging market conditions of the glove industry. The ratings/outlook could be revised downwards if the current industry challenges continue to persist to the extent that the group’s performance sharply deteriorates from expectations.