MARC has reaffirmed the ratings of AA-ID and MARC-1ID on Top Glove Corporation Bhd’s (Top Glove) RM100.0 million Islamic Medium-Term Notes (IMTN) Programme and RM100.0 million Islamic Commercial Papers (ICP) Programme. The ratings outlook is stable. The ratings are premised on Top Glove’s leading global market position and a strong financial profile that is underpinned by sustained growth in revenue and earnings, robust cash flows and low debt leverage. These rating positives are tempered by the continued volatility in latex prices and a weakening US Dollar. 

Top Glove which has a glove manufacturing capacity of 29.7 billion continues to maintain its position as the largest rubber glove manufacturer in the world, accounting for about 24% of the estimated global annual demand of 126 billion pieces as of March 2008. Global demand is projected to grow at 10% to 12% per annum.

The group’s successful venture into upstream concentrated latex production has given it better control over its raw material supply. Its two plants in Thailand now produce 60% of its annual latex requirements. In-house production of latex has resulted in an estimated net margin improvement of between 1% to 2% in addition to 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 rising latex prices have translated into higher production costs and pressured its operating margins. Notwithstanding, Top Glove is confident that it can pass on about 80% of these cost increases to its customers on account of the continued strong global demand for gloves and the pricing leverage it possesses as the largest glove manufacturer in the world. The ability to pass on costs is key to the preservation of margins. In addition, the group maintains a tight rein on costs through cost saving measures, improvements in operational efficiency and R&D initiatives.

Top Glove has embarked on an aggressive expansion strategy to grow its capacity by 20% annually with a view to capturing a 35% global market share by 2010. Top Glove's capacity expansion coincides with similar rapid capacity additions by other major rubber glove players, and poses increased industry risk. 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.

Top Glove’s FY2007 revenue surpassed the billion ringgit mark to reach RM1.2 billion while reported profit before taxation of RM118.6 million was 29% higher year on year. This was achieved on the back of consistent growth in global demand. Despite rising raw material prices and a weakening US Dollar, the group has maintained a double-digit operating profit margin of 10.8% (FY2006: 10.3%) through cost saving measures and improved operating efficiency. Top Glove has bolstered its capital base through a private placement and ESOS shares subscription exercise. Pursuant to the equity raising exercises, Top Glove shareholders’ funds rose to RM637.1 million (FY2006: RM284.1 million) while its debt leverage ratio improved to 0.30 times (FY2006: 0.96 times). Its enlarged capital base provides the group with the means to meet future expansion and undertake opportunistic acquisitions.