Published on 23 Jan 2020.
RAM Ratings has assigned AA2/Stable/P1 corporate credit ratings to Top Glove Corporation Bhd (or the Group). The ratings reflect Top Glove’s dominant market position, extensive product range, diversified geographical presence and fairly strong debt coverage ratios, complemented by resilient demand for rubber gloves.
Top Glove enjoys an entrenched position as the world’s largest glove manufacturer, with an estimated 26% share of the global market for rubber gloves. The acquisition of surgical glove maker Aspion Sdn Bhd has propelled the Group’s share of the surgical glove market from 12% to an estimated 30%, making Top Glove the world’s biggest producer of surgical gloves. That said, the full benefits of the acquisition have yet to materialise due to the initial setback from the change in management team after Top Glove took legal action against the vendor.
Top Glove’s core product comprises latex and nitrile examination gloves which cater to a wide range of industries. The inclusion of Aspion’s portfolio has expanded the Group’s repertoire, which now includes high-end surgical gloves that constituted 10% of its revenue in FY Aug 2019. Nitrile and latex examination gloves accounted for another 46% and 39%, respectively. Top Glove boasts a diversified geographical footprint. Most of its output is exported to Europe (33% of the Group’s sales in FY Aug 2019), North America (29%) and Asia (20%). Its 33 glove factories are dispersed throughout Malaysia (30), Thailand (2) and China (1).
The Group has fairly strong debt coverage ratios. Following the rise in its debt level in FY Aug 2018 to acquire Aspion, Top Glove’s funds from operations debt coverage ratio (FFODC) declined from more than 1 time to 0.30 times, albeit still deemed fairly sturdy. Its FFODC hovered around this level in fiscal 2019 and 1Q fiscal 2020. With relatively stable working capital requirements, the Group’s operating cashflow debt coverage has been ranging around 0.17 to 0.25 times in the last two years. Going forward, Top Glove’s FFODC is projected to come up to around 0.30 times while interest coverage ratio will range around 7 to 8 times.
The ratings are, however, constrained by the Group’s heavy debt load. Top Glove’s borrowings had ballooned to RM2.2 bil as at end December 2018 (end December 2017: RM376 mil), thereby propelling its adjusted gearing ratio from 0.18 to 0.92 times. The Group’s debt level had risen further to RM2.50 bil as at end November 2019, translating into a gearing ratio of 0.97 times and an annualised debt to operating profit before depreciation, interest and tax of 3.3 times. Despite the high gearing ratio, we recognise the defensive nature and healthy prospects of the rubber gloves industry. We also understand that Top Glove is exploring various means to improve its capital structure. To be conservative, we have not factored in the conversion of Top Glove’s USD200 mil Exchangeable Bonds. We note that RM1.17 bil of goodwill resides in its books after the Aspion acquisition, which has not been impaired but remains a source of uncertainty.
RAM notes that Top Glove has initiated a legal suit against the vendor with regards to the acquisition. We have not factored in any cost/proceeds from these legal actions given their protracted nature. While the Aspion incident may indicate a lapse in its risk management procedure, Top Glove has beefed up its internal review process to evaluate future investments.
The ratings are further constrained by Top Glove’s exposure to the fluctuating prices of its key raw materials, i.e. natural latex and nitrile latex, its susceptibility to energy prices, government policies on minimum wages and volatile forex movements, and stiff competition, especially within the examination gloves segment. However these fluctuations are passed on to customers through product repricing although some time lag may occur.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Published by RAM Rating Services Berhad
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Ratings on Top Glove Corporation Bhd