Top Glove Corporation Bhd - 2008

MARC has affirmed the ratings of AA-ID and MARC-1ID  for Top Glove Corporation Bhd’s (Top Glove) RM100 million Islamic Medium Term Notes (IMTN) Programme and RM100 million Islamic Commercial Papers (ICP) Programme. The rating outlook is stable. The ratings are premised on Top Glove’s dominant position in the global arena and a strong financial profile. These rating positives are tempered by the continued volatility in latex prices and a weakening USD. 

Top Glove has continued to maintain its position as the largest rubber glove manufacturer in the world accounting for about 24% of the global annual demand of 126 billion pieces estimated in March 2008. Global demand is projected to grow at 10% to 12% per annum. The company’s glove manufacturing capacity since March 2008 stands at 29.7 billion.

Top Glove has ventured upstream to concentrated latex production to have better control over its raw material supply and protect its profit margins. Its annual 70,000 tonnes of concentrated latex production from its two plants in Thailand not only generates 60% of its annual latex requirements but also contributes an estimated net margin improvement of between 1% to 2% whilst lessening the impact of latex price volatility.

Volatility in latex prices is expected to continue with an upward bias. As latex constitutes more than 50% of Top Glove’s production costs, the volatility of latex prices translates into upward pressure on its production costs and erosion in profitability. Top Glove has represented that it can pass on about 80% of cost increase to its customers due to continuous strong global demand for its gloves and the leverage it has as the leading glove manufacturer in the world. This ability to pass on costs is key in ensuring margins are preserved. The company absorbs the remaining cost increases via cost saving measures, improvements in operational efficiency and R&D initiatives.

Top Glove’s aggressive expansion strategy to grow its capacity 20% annually and capture a 35% global market share by 2010 and similar rapid capacity expansions by other major rubber glove players remain a rating concern. Excess capacity could eventually cause oversupply in the market and consequently, falling prices. In the near-term, the risk of oversupply is mitigated by the continued growth in the global demand for rubber gloves and Top Glove’s strong financial profile. 

Top Glove’s FY2007 revenue surpassed the billion ringgit mark while its reported profit before taxation of RM118.6 million was 29% higher year-on-year. This was achieved on the back of a consistent growth in global demand. Despite rising raw material prices and a weakening USD, the group has maintained its operating profit margin at a double digit level of 10.8% (FY2006: 10.3%) attributable to cost saving and economies of scale. The group’s debt leverage position has significantly improved to  0.30 times (FY2006: 0.96 times) following the completion of its private placement and ESOS shares subscription exercise in FY2007, which increased its shareholders’ funds to RM637.1 million (FY2006: RM284.1 million). 

Principal Activity

Manufacturing, trading and export of latex examination, surgical, and clean room, and household gloves as well as non-latex nitrile and vinyl gloves.

Major Rating Factors
 
Strengths

• Largest rubber glove manufacturer in the world;
• Successful upstream diversification to secure latex supply and protect profit margin; and
• Strong management team.

Challenges/Risks

• Exposure to volatile raw material prices and foreign exchange rate movements;
• Ability to pass on cost increases to customers.