Top Glove acquiring two rubber glove assets a step in the right direction

KUALA LUMPUR: Top Glove Corporation Bhd’s (Top Glove) latest corporate development, which involves wholly-owned subsidiary GMP Medicare Sdn Bhd (GMP) acquiring two rubber glove assets amounting to RM39 million, has been viewed positively and a step in the right direction by analysts.

In a filing on Bursa Malaysia, Top Glove’s board of directors announced that GMP had entered into two separate sale and purchase agreements with A1 Glove Sdn Bhd and Titi Glove Sdn Bhd to acquire two rubber glove assets for the total amount of RM39 million.

In the research arm of Kenanga Investment Bank Bhd’s (Kenanga Research) view, this latest corporate development by Top Glove is positive and a step in the right direction and a mild surprise to market.

“The newly announced acquisitions further amplify that Top Glove is committed towards fulfilling its goal to grow not only organically but via acquisition,” Kenanga Research.

“More importantly, these acquisitions allow Top Glove to have a bigger and direct access to the China market (China sales accounts for 50 per cent to total sales of these two factories).”

The research arm added that with the latest acquisitions, these plants can immediately contribute to Top Glove’s bottomline compared to a green field rubber gloves plant which takes 12 to 18 months to commence operations.

Kenanga Research noted that currently both factories generate a revenue of RM150 million per annum with a net margin of two to three per cent.

However, with Top Glove’s management quality and track record of cost reduction and plant efficiency coupled with the group bulk purchasing power, the research arm expected net margin for these both factories can only improve.

“We wont be surprised that plans are in place to upgrade the lines in order to enhance efficiencies and hence improve margins considering that the average age of the lines are about seven years old,” Kenanga Research said.

For illustrative purposes, assuming two billion pieces with average selling prices (ASPs) of US$21 per 1,000 pieces, RM4.30 amounting to US$1.00, 80 per cent utlisation rate and a net margin of eight per cent, these two factories are expected by the research arm to record a net profit of RM12 million per annum or three per cent of its financial year 2018 estimate (FY18E) net profit forecast.

The research arm thus left its FY17E and FY18E forecasts unchanged for now.

Post wintering months of between December till April, Kenanga Research expected latex cost to trend downwards and hence volume sales to pick up again as buyers return to the market to replenish.