CREDIT ANALYSIS REPORT

TG EXCELLENCE BERHAD - 2021

Report ID 605407 Popularity 1434 views 98 downloads 
Report Date Mar 2021 Product  
Company / Issuer TG Excellence Bhd Sector Industrial Products
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     MARC has upgraded Top Glove Corporation Berhad’s (Top Glove) corporate credit rating to AA+ from AA and concurrently affirmed its rating of AA-IS(CG) on special purpose vehicle TG Excellence Berhad’s RM3.0 billion Perpetual Sukuk Wakalah Programme. The ratings outlook is stable. TG Excellence is a wholly-owned special purpose subsidiary of Top Glove.

Rationale     As Top Glove provided a subordinated unconditional and irrevocable corporate guarantee on TG Excellence’s perpetual sukuk, the credit analysis is on Top Glove. The rating on the perpetual sukuk continues to reflect its subordination to Top Glove’s senior and unsecured obligations and the risk of deferred profit distributions, in line with MARC’s notching principles on hybrid securities for entities rated in the AA space and above. Nonetheless, MARC believes there is a low likelihood of Top Glove deferring the profit payments, given the dividend suspension clause and the company’s current strong cash position.

The rating upgrade is premised on the significant increase in Top Glove’s revenue and cash flow on the back of recording unprecedented sales of gloves resulting from the COVID-19 pandemic. For the first quarter ended November 30, 2020 (1QFY2021), revenue increased to RM4.8 billion while profit before tax rose to RM3.1 billion, exceeding the performance for full financial year ended August 31, 2020 (FY2020). The higher earnings coupled with the full conversion of its USD200 million convertible bonds have strengthened Top Glove’s capital structure. Group borrowings declined to RM433.9 million with the adjusted debt-to-equity (DE) ratio improving significantly to 0.17x at end-1QFY2021 from 0.95x in FY2019. Group leverage is not expected to increase over the medium term as its expansion strategy will be largely met by internally generated funds.

Cash flow generation from operations would remain supportive of the group’s targeted capex of up to RM2.0 billion p.a. over the next five years that would result in capacity increase by an average of 20 billion pieces annually (current capacity: 93 billion pieces). Cash flow from operations (CFO) stood at RM3.5 billion and RM3.2 billion in FY2020 and 1QFY2021. The increased capacity is aimed at reducing the order lead time which has increased to about 300 days from about 30 days previously. Nevertheless, we note that the capex spending will remain driven by the global demand for gloves; committed capex stands at about RM1.9 billion in 2021. The Malaysian Rubber Glove Manufacturers Association (MARGMA) has forecast demand to increase between 15% and 20% over the medium term. This notwithstanding, existing and new entrants into the glove manufacturing industry are adding capacities that will reduce the supply-demand gap in the medium term.

Given that the demand for gloves has remained high, MARC expects Top Glove’s earnings to remain strong over the medium term. Notwithstanding the marked improvement in group performance, concerns over foreign worker issues in the manufacturing industry have surfaced. While these have led to restrictions on some of the group's exports, the group has implemented measures to address this issue and allay stakeholders' concerns. These are reflected in remedial actions to improve worker welfare, including investment of about RM90 million to improve their workers’ existing living quarters and to acquire additional hostels. The group has also committed to make remediation payments of approximately RM136 million to its foreign workers, on recommendations by an independent consultant. As of February 16, 2021, Top Glove has made seven remediation payments totalling RM76.2 million.

Rating outlook     
The stable rating outlook reflects our expectation that Top Glove will continue to maintain its healthy cash flow generation to meet its financial obligations and fund expansions.

Rating trajectory

Upside scenario     
We do not expect any further upside to the ratings and/or outlook over the next 12 months.

Downside scenario     
The ratings and/or outlook could come under pressure if liquidity weakens substantially through acquisitions not related to its core business and/or investments that are non-earnings accretive. In addition, any persistent restrictions on the group’s exports or other factors that affect its financial performance will prompt a credit reassessment.

Key Strengths
World’s largest glove manufacturer
Very strong liquidity position
Healthy debt coverage metrics
Low client concentration risk

Key Risks
Ongoing foreign labour issues
Exposure to raw material costs and foreign exchange rates
Increased capacity in the glove manufacturing industry

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