MARC Ratings has revised the outlook on Top Glove Corporation Bhd’s (Top Glove) corporate credit rating to negative from stable on concerns that the impact from the continued tough global market conditions for glove manufacturers will weigh on the group’s performance. Concurrently, the rating outlook on the RM3.0 billion Perpetual Sukuk Wakalah Programme of Top Glove’s wholly-owned funding vehicle TG Excellence Berhad has also been revised to negative. As the perpetual sukuk it issued is unconditionally and irrevocably guaranteed by Top Glove, the rating assessment is premised on the credit strength of Top Glove. MARC Ratings has maintained the Top Glove and TG Excellence ratings at AA+ and AA-_IS(cg), with the rating differential reflecting the subordination of the perpetual sukuk to the parent’s senior unsecured obligations. The outstanding perpetual sukuk currently stands at RM1.18 billion.

Top Glove’s group performance was expected to normalise as factors that had prompted the significant run-up in demand and consequently glove prices during the height of the COVID-19 pandemic eased as the crisis abated. However, the lingering imbalance in global supply-demand of gloves due to overcapacity and excess stockholding, as well as increased competition from China has substantially reduced glove prices. Average price declined by around 60% compared to at the height of the crisis. 

The rating agency also notes that in addition to the weakened selling prices of gloves, Top Glove had to contend with the recent substantial hike in natural gas prices as well as increased labour costs. These factors have contributed to an erosion in profit margin. For the first half of the financial year ending August 31, 2023 (1HFY2023), earnings before interest, tax, depreciation and amortisation (EBITDA) was negative of about RM125 million on lower revenue of RM1.3 billion (1HFY2022: about RM528 million; RM3.1 billion). MARC Ratings expects financial performance for full year FY2023 to remain subdued.

Top Glove retains a healthy liquidity position of RM703.9 million relative to its financial obligations as at end-February 2023; however, these levels are lower than those seen during the height of the pandemic in 2020-2021. The group has used its liquidity position to make dividend payments, fund capex and share buybacks in the past two years. The group has no notable maturities over FY2023-FY2024, and with adjusted debt-to-equity (DE) and net DE ratios of 0.23x and 0.11x, it has the wherewithal to weather the challenging period. It has also undertaken measures to shore up its liquidity position by deferring expansion of production capacity (this stood at 100 billion pieces p.a. as of end-2022), initiating temporary shut down and decommissioning older production lines. It will also not declare dividends in FY2023.

MARC Ratings will undertake a review on Top Glove’s rating within the next six months. The rating could be lowered if challenges the group currently faces continue to hamper any meaningful improvement in financial performance, particularly its cash flow metrics. The rating differential on the perpetual sukuk would remain at two notches. Conversely, notable and sustainable improvements in the group’s credit profile could lead to the ratings outlook being revised back to stable.

The negative outlook reflects our concerns that the impact from the continued tough global market conditions for glove manufacturers will weigh on Top Glove’s performance. 

We do not envisage any upside to the rating over the near term. 

The ratings could be lowered within the next six months if challenges the group currently faces continue to hamper any meaningful improvement in financial performance, particularly its cash flow metrics.