Top Glove plans more ac­qu­si­tions to strengthen mar­ket share

The Star Malaysia - StarBiz - - Companies & Strategies - By DALJIT DHESI daljit@thes­

AF­TER ac­quir­ing As­pion Sdn Bhd, its largest buy to date, Top Glove Corp Bhd is po­si­tion­ing it­self for more ac­qui­si­tions.

With­out go­ing into de­tails, ex­ec­u­tive chair­man Tan Sri Lim Wee Chai tells StarBizWeek that the ac­qui­si­tion of As­pion is the com­pany’s largest and is one of many more to come.

He says grow­ing in­or­gan­i­cally via ac­qui­si­tions will be the pri­or­ity of Top Glove in its quest to be a global leader in glove man­u­fac­tur­ing.

“A com­pany of our size will need to em­bark on merg­ers and ac­qui­si­tions (M&As) in ad­di­tion to or­ganic growth to grow faster and more ef­fi­ciently, if we are to achieve the am­bi­tious goals we have set.

“Th­ese in­clude in­creas­ing our mar­ket share to 30% by 2020, be­com­ing a Bursa Malaysia Top 20 com­pany by 2020 and a step fur­ther by be­com­ing a For­tune Global 500 com­pany by 2040.

“This can­not be achieved by or­ganic growth alone. That is why we con­tinue to strate­gi­cally pur­sue M&As and joint ven­tures, and es­tab­lish new set-ups in re­lated busi­nesses, which will play an es­sen­tial role in en­abling us to main­tain our lead­er­ship po­si­tion in the glove mar­ket,” he says.

Lim says the com­pany is con­stantly ex­plor­ing M&A op­por­tu­ni­ties, par­tic­u­larly those with good valu­a­tions and in syn­er­gis­tic busi- nesses which are able to im­me­di­ately con­trib­ute to the group.

On April 4, Top Glove an­nounced that it has com­pleted the ac­qui­si­tion of As­pion to emerge as the world’s largest sur­gi­cal glove man­u­fac­turer, fur­ther so­lid­i­fy­ing its lead­er­ship po­si­tion as the world’s largest man­u­fac­turer of gloves.

The RM1.37bil ac­qui­si­tion of As­pion adds three man­u­fac­tur­ing fa­cil­i­ties with 75 lines and a ca­pac­ity of 4.77 bil­lion pieces of gloves per an­num. As a re­sult, Top Glove now op­er­ates a to­tal of 37 fac­to­ries with 618 pro­duc­tion lines and a ca­pac­ity of 57.24 bil­lion pieces of gloves per year.

Lim adds that with the ac­qui­si­tion, he ex­pects an in­crease in Top Glove earn­ings in 2018 and 2019.

“The in­creased pro­duc­tion ca­pac­ity will also al­low the group to en­joy bet­ter economies of scale and com­pete more ef­fec­tively in the global mar­ket by cap­tur­ing a greater mar­ket share, par­tic­u­larly from multi­na­tional glove com­pa­nies who are mov­ing to­wards out­sourc­ing their pro­duc­tion ca­pac­i­ties,” he says.

RHB Re­search in its note this month said it has up­graded Top Glove to “buy” from its ear­lier “neu­tral” stance, among oth­ers, as it ex­pected the com­pany’s share price to con­tinue to out­per­form the mar­ket, driven by re­silient de­mand, mar­gin ex­pan­sion from its As­pion ac­qui­si­tion due to greater economies of scale and prod­uct mix.

The re­search house has raised Top Glove’s fi­nan­cial year 20182020 fore­casts net profit by 6%-9% and ex­pect the com­pany to gen­er­ate a two-year net profit com­pounded an­nual growth rate of 24%.

Prior to com­plet­ing its ac­qui­si­tion of As­pion, Top Glove, via its wholly-owned unit, had in March en­tered into a share pur­chase agree­ment with the ex­ist­ing share­hold­ers of Du­ramed­i­cal for an 85% eq­uity in­ter­est in the lat­ter for RM2.85mil. The deal is ex­pected to be com­pleted in the third quar­ter of fi­nan­cial year 2018.

The com­pany, in a fil­ing with Bursa Malaysia, said the pro­posed ac­qui­si­tion is an ini­tia­tive to di­ver­sify into med­i­cal-re­lated prod­ucts, which cater to its cur­rent cus­tomer base in line with the group’s ex­pan­sion plan.

On the com­pany’s fi­nan­cial per­for­mance for this year, Lim is op­ti­mistic of Top Glove grow­ing its rev­enue and earn­ings yearly by 10% and be­lieves that it is well on its way to achiev­ing this.

He says that for ex­am­ple, in the first half of its fi­nan­cial year 2018, sales vol­ume im­proved by 19% ver­sus the first half of the pre­vi­ous cor­re­spond­ing pe­riod.

The sig­nif­i­cant growth in sales vol­ume was mainly at­trib­uted to an in­crease in de­mand for nat­u­ral rub­ber gloves, he says.

He adds that the com­pany was able to meet the de­mand ow­ing to its bal­anced prod­uct mix, com­pris­ing both nat­u­ral rub­ber and nitrile gloves.

Ac­cord­ing to Lim, the cu­mu­la­tive profit af­ter tax for the first-half pe­riod is al­ready equiv­a­lent to 65.7% of Top Glove’s full-year profit for fi­nan­cial year 2017. Dur­ing the six-month pe­riod, profit af­ter tax soared by 37.7% to RM215.9mil from a year ago.

De­spite the chal­leng­ing busi­ness en­vi­ron­ment, he says prospects for the glove in­dus­try re­main promis­ing as gloves are an es­sen­tial item in the health­care in­dus­try and also do not cost much.

As a dis­pos­able item, Lim adds that its de­mand will be re­cur­ring and is pro­jected to grow by 8% to 10% ev­ery year.

Some of the chal­lenges for the in­dus­try this year in­clude the hike in the aver­age nat­u­ral gas tar­iff, em­ploy­ers hav­ing to ab­sorb the cost of for­eign work­ers levy, the im­ple­men­ta­tion of the Em­ployee In­surance Scheme and the pro­posal for a new min­i­mum wage, he says.

Lim: A com­pany of our size will need to em­bark on M&As in ad­di­tion to or­ganic growth to grow faster and more ef­fi­ciently.

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