Top Glove may cut stake in Indonesia plantation


  • Business
  • Saturday, 06 Sep 2014

Top Glove Corp Bhd, the world’s largest rubber glove manufacturer by volume, may pare down its stake in its Sumatran rubber plantation and seek out local partners as Indonesia mulls tough new laws to curb foreign ownership of plantations.

Acquired in 2012, Top Glove now wants to reduce its interest in the greenfield rubber estate, which has not performed to expectations, says founder and chairman Tan Sri Lim Wee Chai.

The group is scouting for joint-venture partners who can work with the local government and manage employees, Lim tells StarBizWeek on the sidelines of the International Rubber Glove Conference and Exhibition earlier this week.

He did not specify if Top Glove was in any active talks with potential partners or how much of the plantation the company was willing to part with.

Planting of new trees on the land is still in the early stages and will take another six to seven years before harvesting can begin, according to Lim. The venture is to remain a loss-making concern until then.

Top Glove had bought a 95% stake in PT Agro Pratama Sejahtera two years ago for RM22mil, giving it a 60-year concession to plant rubber trees on 30,773ha of land in Sumatra.

The acquisition was meant to help Top Glove secure a steady supply of natural rubber – the main raw material used to produce latex gloves, its core product – and hedge against the volatility of commodity prices.

The firm has set aside some RM450mil for the plantation, including the cost of land, planting and operations, to be spread over 14 years. All eight phases of the plantation will need 14 years to mature.

But market observers now wonder if the move is superfluous, given that rubber prices have fallen to multi-year lows on the back of high stockpiles and a surplus in supply that started in 2011 and could last through 2016.

As of its third quarter ended May 31, Top Glove’s own latex costs dipped 3.5% from the second quarter to an average of RM4.65 per kg, a five-year low.

Neutral effect

“This is the first time I’m hearing of a plan to cut its stake in the plantation, but the effect on Top Glove should be neutral as the problems had been anticipated,” remarks a bank-backed analyst.

“They (Top Glove management) have been quizzed about the political and other risks that could arise from managing a plantation business in a foreign country without a track record. I guess the problems are showing themselves now.”

Analysts say Top Glove could book a small gain if it succeeds in hiving off some of its shares in the rubber plantation.

It was recently reported that Indonesian lawmakers are looking to restrict foreign ownership of plantations to no more than 30% from the current cap of 95%.

Indonesia’s parliament could finish discussions on the draft bill with the government soon and get it approved before the new administration is in place, according to Reuters.

Firms would be given five years to comply with the new bill, and those that refuse may face fines, temporary suspensions or a revocation of their licences.

Meanwhile, Lim is of the view that profit margins for rubber glove manufacturers will continue to be squeezed by the aggressive capacity growth in nitrile gloves.

“It’s getting more and more competitive. We have to work harder, smarter and faster. Demand is always there, and it may grow 8% to 10% (a year), but if supply grows 10% or 20%, that will put pressure on prices.”

Top Glove had said in June that it was on track to commission new lines at Factory 27 by August and Factory 29 by December, boosting its total production to 484 lines from 464 and installed capacity to 44 billion pieces of gloves from 42 billion.

Both Factory 27 and Factory 29 will produce nitrile gloves, which are made from synthetic rubber, a derivative of crude oil.

The group is expected to increase its nitrile capacity by two to three billion pieces of gloves per year, say analysts.

Nitrile vs latex

But while it enjoys gross margins of 20% for nitrile gloves versus 15% to 18% for latex, Maybank IB Reseach says in a June note that that premium could diminish over the next two years amid new nitrile capacity numbering in the billions and a lack of expansion in the latex segment.

Top Glove has the most “sell” calls of Malaysia’s big four rubber glove makers, which include Kossan Rubber Industries Bhd, Supermax Corp Bhd and Hartalega Holdings Bhd

According to Bloomberg data, there are three “buy”, 11 “hold and six “sell” ratings on the stock, with target prices ranging from RM4.56 to RM5.34. Its shares were last traded at RM4.79, down 14.92% for the year.

Top Glove’s pre-tax profit per 1,000 gloves of RM7.10 is also the worst among the four, even though it has the largest revenue base.

Asked whether Top Glove can better its margins, Lim says: “When your capacity is big, you are selling volume. Our capacity is double that of our nearest competitor. We are under extremely high pressure to sell.”

“Top Glove’s margins are likely to remain the lowest of the four, because its strategy has always been to play the volume game,” explains an analyst. “Nonetheless, I believe its margins will be stable at the current level.”

On another note, Lim points out that the rubber glove giant's diversification into property is paying off. 

“We were returning out 50% of our earnings as dividends every year. Then we realised the cash could be better used to diversify our earnings base from just manufacturing," he quips.

“And interest rates from banks on cash were not attractive. We don’t want to just leave money in the bank and let it become lazy cash. As a long-term investment, property is a good option for us.

“Malaysia’s property market is one of the most affordable in the region, cheaper than Jakarta, Bangkok, Shanghai, Singapore and Hong Kong.”

Top Glove owns 27% of the East Wing of The Icon near Kuala Lumpur city centre, which it bought together with a private vehicle belonging to Lim last year for RM226mil.

The asset is estimated to yield a 7% return for Top Glove. The overall contribution from property investment to the group, however, is negligible.


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