Top Glove, the largest glove manufacturer in the world with a 26% global market share, issued MYR1.3bn Perpetual Sukuk Wakalah in February 2020 from its MYR3.0bn Programme via its wholly-owned special purpose vehicle, TG Excellence Berhad. The perpetual sukuk is callable on 27 February 2025 with a profit rate of 3.95% and rated AA-(IS) by MARC. The proceeds were to be used for refinancing of existing obligations and to partly fund their capex requirements. With demand for medical gloves surges dramatically from the global outbreak of Covid-19, glove makers credit profile will set to benefit and is likely to be the ideal defensive play.
The world’s largest glovemaker set to expand further
Top Glove is a well-known company among retail and institutional investors as the world’s largest glove manufacturer with 711 production lines in 34 factories of 73.4bn pieces capacity currently. The Group targets to increase their overall capacity to 91.1bn by the end of 2021 by adding 150 additional production lines. The Group has shifted their attention on the higher-margin nitrile gloves, which formed 42% of total sales in FY19 while venturing into the specialised surgical glove subsequent to acquisition of Aspion Sdn Bhd in 2018. By geography, Top Glove’s top three sales destinations are well-diversified between Europe (31%), North America (27%), and Asia ex-Japan (15%).
Strong revenue growth in FYAug-19, profits impacted by price of raw materials
Top Glove posted commendable sales growth of 14% in FYAug-19 to MYR4.8bn on better product mix but suffer margin compression as a result of higher operating costs as net profit margin fell 2bp from 10% to 8%, mainly from latex prices (both natural and nitrile) and timing to pass the price increase to customers. As for this year, Top Glove guided for improvement in margins from the surge in Covid-19 demand, which resulted in higher average selling price from April-2020 onwards which should offset the impact from higher gas prices and minimum wages earlier. The defensive and healthy nature of the rubber gloves industry and Malaysia’s global market leadership of the sector are credit merits to consider.
Perpetual sukuk has eased Top Glove’s gearing
As 50% of the perpetual sukuk will be treated as equity according to MARC’s methodology, Top Glove’s debt-to-equity (D/E) ratio has eased from 0.95x as of FYAug-19 (which has skyrocketed due to the acquisition of Aspion) to 0.59x as of end February 2020. Debt coverage – that can be measured by cashflows from operations (CFO) to interest expenses remained healthy at 7.6x, with expected range of 7-8x. Rating agencies foresee that Top Glove’s leverage to remain stable in the absence of another debt-funded acquisition.
Top Glove’s perpetual sukuk yield more than the dividend
Based on Bix Malaysia’s last trading activities on Top Glove perpetual sukuk here, it was last transacted at 4.49% on 24 March 2020, which is superior to the stock’s current dividend yield of 1.00%-1.20%. Given rising volatility and uncertainty in the equity market, investors may choose the perpetual as alternative exposure to Top Glove.
Visit BIX Malaysia website for more details on the perpetual bonds/sukuk
Investors may visit BIX Malaysia website to find important information on the issuer, coupon/profit rate, maturity/call date, rating and the latest trading activities under “Security Information”. In addition, investors can also download key documents such as the Information Memorandum (similar to Prospectus for equities IPO) and Trust Deed (similar to Loan Agreement) which detailed the terms of the bonds/sukuk.
is a former Head of fixed income and credit analyst,
covering GCC and Global Sukuk markets. He previously worked as a credit strategist at one of Malaysia’s sell-side research house; also used to serve a private bank in Kuala Lumpur with focus on generating bottom-up ideas from both Investment Grade and High Yield bonds in the Asian credits space. Fakrizzaki was a bond analyst at one of local asset management firm having debuted his career as an auditor at one of the ‘Big 4’. The article is his own opinion from experience in the industry for over sixteen years. He believes that retail investors need more understanding to the credit markets in order to diversify their investment portfolio, especially from current volatile equity market.
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