MARC has reaffirmed the long and short term ratings of AA- ID and MARC-1ID  respectively with a stable outlook for Top Glove Corporation Bhd’s (Top Glove) Islamic Medium-Term Notes (IMTN) Programme of up to nominal value RM100 million and Islamic Commercial Papers (ICP)Programme of up to nominal value RM100 million based on its scale of business as the largest glove maker in the world and its strong operating financial performance. Constraining rating factors include the group’s aggressive expansion, the competitive nature of the industry and vulnerability to raw material price increases.

As at March 2007, Top Glove further consolidated its position as the number one rubber glove manufacturer in the world accounting for 22% (August 2006: 19.6%) of the estimated global annual production of 123 billion pieces of manufactured rubber gloves. Global demand is growing at an estimated rate of around 12% per annum.
 
The group has ventured upstream to have better control over its raw material supply and protect its profit margins. In May 2006, Top Glove acquired Thailand-based B Tech Industry Company Limited (B Tech), a concentrated latex manufacturer with capacity to produce 40,000 tonnes of latex per annum. A second latex concentrated plant with production capacity of 50,000 tonnes of latex per annum, located in Hatyai, Thailand was completed in March 2007 and is currently being commissioned. Top Glove will enjoy an estimated cost saving of up to 3% to 4% once both plants are fully operational. The expected 90,000 tonnes per annum of latex output from both plants will, in addition to meeting 70% to 80% of Top Glove’s latex requirement, lessen the negative impact of latex price volatility currently faced by the group.

Top Glove is also broadening its business lines and product portfolio varieties to capture new market segments. In March 2007, Top Glove acquired Medi-Flex Ltd (Medi-Flex), a specialist in manufacturing clean room gloves for RM27.5 million for this purpose. Medi-Flex is listed on the Singapore Stock Exchange and owns two production plants in Klang and Banting with 27 production lines capable of producing 1.6 billion gloves a year. For FY2006, Medi-Flex reported revenue of RM89.0 million and an after-tax loss of RM28.9 million. Top Glove expects to turn around this 60.06%-owned subsidiary by the first quarter of 2008.
 
Since MARC’s last review in October 2006, continuing volatility in latex prices has been observed and is expected to continue. As latex constitutes more than 50% production costs, the volatility of latex prices translates into upward pricing pressure for producers. The group has represented that it can pass on 70% to 80% of these price increases to their customers and absorb the remaining increases via cost saving measures.

Top Glove’s aggressive expansion strategy and the rapidly expanding capacities of other major rubber glove players in recent years 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 has consistently demonstrated strong revenue and profitability growth over the past six years (2001 to 2006), registering a compounded average growth rate of 48.2% per annum in tandem with increases in production capacity as well as increases in its global customer base. Operating margins have been maintained at double digit levels. The group’s recent private placement and ESOS share subscription has raised additional funds amounting to RM250.1 million. The enlarged shareholders’ funds of RM569.8 million (inclusive of higher retained earnings) as at February 2007 has brought down Top Glove’s gross debt to equity ratio to a more prudent level of 0.44 times.