MARC has affirmed its MARC-1ID/AA-ID ratings on Top Glove Corporation Berhad’s (Top Glove) RM100 million Islamic Medium-Term Note Programme and RM100 million Islamic Commercial Papers Programme with a positive outlook. The affirmed ratings reflect Top Glove’s global market leadership, sound business model and robust credit metrics. Moderating the ratings would be the sensitivity of its profit margins to movements in latex prices and currency due to a lag in price adjustments.

Top Glove is the world’s largest rubber glove manufacturer with 22% of global market share where the estimated global demand is 140 billion pieces of gloves per annum. The glove manufacturer’s revenue base is well diversified by geography and customers. It exports to 180 countries worldwide encompassing 850 customers. Top Glove’s focus on organic growth continues to be reflected in its planned capacity addition of three billion pieces of gloves per annum for 2009 and 2010. Half of this capacity came onstream this year with a new factory which commenced operation in June 2009 (Factory 19) while another factory (Factory 20) is scheduled for completion of production lines installation by February 2010. In addition, the group has planned to commence construction of another new factory (Factory 21) in Klang in August 2009. This additional capacity will support its medium-term strategic plan of increasing its global market share to 30% and allow the group to capitalise on positive industry dynamics. As rubber gloves are a necessity in the healthcare industry, the rubber gloves sector has benefited from increasing healthcare and hygiene standards, and is proving to be highly resilient in the economic downturn.

Top Glove produces the full range of gloves products, however, rubber gloves maintains the largest share of its product mix. This allows Top Glove to respond promptly to shifts in demand for different types of gloves, especially between rubber and nitrile gloves. A case in point would be the increased production of nitrile gloves from 4% in FY2004 to 7% in FY2008, to meet increasing demand for nitrile gloves in the more developed markets like North America.

The group has continued to exhibit solid revenue and pre-tax profit growth for financial year ended August 31, 2008 (FY2008). Top Glove recorded a 12.1% increase in sales to RM1,377.9 million and a 13.5% increase in pre-tax profit to RM134.6 million, helping it preserve operating profit margins at the 10+% level which has been maintained since FY2005. The pressure on Top Glove’s operating margins from latex price movements has been largely offset through price increases implemented by the glove manufacturer. Top Glove’s strong market position allows it to take appropriate pricing action, as reflected in its resilient margins. Its cash conversion cycle lengthened to 61 days (FY2007: 51 days), mainly due to rising receivables and inventory which, in turn, reflects a surge in latex prices to a high of RM 7.20/kg in July 2008. Latex makes up 52% of production costs. Consequently, cash flow from operations showed a decrease to RM98.6 million (FY2007: RM119.1 million). With a moderation in capital expenditures, Top Glove generated RM5.3 million of free cash flow (FY2007: -RM6.8 million). This further improved to RM143.83 million for the third quarter ending May 31, 2009. For the nine-month period ended May 31, 2009 (3Q2009), Top Glove reported a 9% increase in revenue to RM1,104.6 million and a 48% increase in pre-tax profit to RM 142.54 million compared to the corresponding period last year. The improved results were attributed to more effective cost control, favourable movement in exchange rates, better product mix as well as higher demand. Debt-to-equity ratio further improved to 0.11 times from 0.27 times during FY2008 as a result of reduction in the group’s borrowing and higher retained earnings. Cash and bank balances have also increased to RM173.2 million as at end 3Q2009 (FY2008: RM 121.5 million).

The positive outlook reflects positive trends in key financial metrics, visible in its recently announced 3Q2009 results. Continuing improvements in earnings growth, profitability and leverage measures could lead to higher ratings in the near-to-medium-term.

Contacts: 
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my;
Jason Kok 03-2090 2258/ jason@marc.com.my