MARC has assigned a final rating of AA-_IS to TG Excellence Berhad’s proposed RM3.0 billion Perpetual Sukuk Wakalah Programme. TG Excellence Berhad is a special purpose wholly-owned subsidiary of Top Glove Corporation Bhd (Top Glove) to which MARC has concurrently assigned a corporate credit rating of AA. The ratings carry a stable outlook.

Top Glove will provide a subordinated unconditional and irrevocable corporate guarantee on the perpetual sukuk. The one-notch rating differential between Top Glove’s corporate credit rating and the perpetual sukuk rating is based on MARC’s notching principles for subordinated debt and hybrid securities methodology. In arriving at the notching, MARC has considered Top Glove’s senior debt relative to the proposed perpetual sukuk issuance and expects this relative strength to be maintained through prudent capital management. Proceeds from the initial issuance of the proposed perpetual sukuk of up to RM1.5 billion will be largely used to refinance Top Glove’s existing obligations and to part fund its capex requirement. Issuances under the perpetual sukuk will also be accorded 50% equity credit under the rating agency’s aforementioned methodology.

The assigned corporate credit rating reflects Top Glove’s demonstrated strong revenue growth and healthy cash flow generation with stable working capital management. It remains the world’s largest glove manufacturer, commanding about 26% of global capacity as at end-August 2019 (FY2019). The group currently has 687 production lines in 33 glove factories with a combined capacity of 70.5 billion pieces which grew from 51.9 billion pieces in FY2017, reflecting the group’s ability to maintain its lead position and capture growing global demand. The group’s growth strategy over the near term is to expand its overall capacity to 91.4 billion pieces by end-2021, funded by internally-generated funds and borrowings. 

The group has a globally diversified customer base with the largest client accounting for about 4.0% revenue in FY2019, mitigating client concentration risk. Top Glove has gradually shifted its focus to meet the increased demand for higher-margin nitrile gloves which accounted for 46% of the group’s total glove sales in FY2019 from 35% in FY2017. The group’s product diversification efforts also involved venturing into the specialised surgical glove segment through the acquisition of Aspion Sdn Bhd for RM1.37 billion in 2018. While revenue from the surgical glove segment has increased to 10% in FY2019 from 4% in FY2017, the largely debt-funded acquisition of Aspion has strained the group’s leverage position with debt-to-equity (DE) ratio standing at 0.95x as at end-FY2019 from the pre-acquisition level of 0.18x. MARC notes that Top Glove has initiated a legal suit in July 2018 with regard to the Aspion acquisition.

MARC expects debt-funded acquisitions of such a scale will not be a recurring feature of the group going forward. The group’s DE ratio will improve to about 0.72x upon the issuance of the perpetual sukuk. Over the next two years, leverage is expected to remain around this level before declining to below 0.60x by FY2020. Group borrowings currently comprise about RM1.3 billion in long-term facilities with the bulk of the remainder comprising short-term funding. 

In FY2019, revenue grew by 13.8% y-o-y to RM4.8 billion while operating profit fell by 8.5% y-o-y to RM495.3 million partly due to an increase in latex price and the time-lag in product repricing. As with other glove manufacturers, the group is exposed to fluctuations in the price of raw materials, the key manufacturing cost component. These fluctuations are passed on to customers through product repricing. Operating profit margin declined due to prevailing competitive pressures, registering 10.3% in FY2019 (FY2018: 12.8%); the ongoing shift to higher-margin products is expected to support overall margins. Cash flow from operations stood at RM605.8 million in FY2019, providing strong interest cover of 7.61x.

The stable rating outlook reflects our expectation that Top Glove will continue to generate strong and stable cash flow from operations to support its growth plans as well as to meet its financial obligations. However, the ratings/outlook would be reviewed should the group increase its borrowings to the extent that its cash flow coverage metrics weaken significantly.