Investors Should Know These 4 Risks That Top Glove’s Management Shared

The Malaysia-based Top Glove (SGX: BVA)(KLSE:7113.KL) is the largest gloves maker in the world with a market share of about 25%. The company, which has a primary listing on Malaysia’s stock market, Bursa Malaysia, was dual-listed here in Singapore in June 2016.

The company recently published its annual report for its fiscal year ended 31 August 2017 (FY2017). I have been reading the report to better understand Top Glove’s business.

One of the sections that I paid close attention to was the Letter To Stakeholders And Management Discussion & Analysis. This is where Top Glove’s management shared their key messages to the company’s stakeholders. In this article, I want to explore the risks affecting Top Glove that management highlighted.

In the letter, management discussed some of the challenges Top Glove faced in FY2017 (emphases are mine):

“The Group also had to address challenges on several fronts during the year in review. These included an unprecedented spike in raw material prices particularly in the first half of FY2017 and sharp movements in the USD. For FY2017, the average natural rubber latex price was RM5.76/kg, 46.4% higher than FY2016, while the average nitrile latex price was USD1.1/kg, up 11.9% compared with the previous financial year. The volatility in raw material prices as well as forex, resulted in a mismatch in the cost-pass-through system.”

We can see from the quote above that one of the main risks that Top Glove is facing is the volatility in its raw material prices. In FY2017, the average price of natural rubber latex increased by a sharp 46.4%, while the average nitrile latex price rose 11.9%. Any raw material that can fluctuate in price by over 40% in a year is clearly a major financial risk to its users.

In addition, Top Glove is exposed to currency fluctuations since it manufactures in Malaysia but exports most of its gloves.

Failure to manage the two risks of raw material price volatility and currency fluctuations could cause a mismatch of revenue and cost. This could then have a negative impact on Top Glove’s profitability.

There’s more from management (emphases are mine):

“In addition, there were escalating utility costs to contend with [in FY2017]. Competition during the year in review also continued to intensify, as major players ramped up their production capacity in the nitrile glove segment.”

Given the quote above, investors who are vested or interested in Top Glove should also consider both utility costs and the level of competition. Both factors increased in FY2017, and it is likely in my view that both will continue to climb over time. In other words, Top Glove will always need to deal with utility costs and competition to maintain its market share and profitability over the long term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.