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How Top Glove Is Dealing With The Risks To Its Business

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 a previous article, I explored the main risks that the company is facing. In this article, I want to look at how the company is addressing these risks.

Here’s a quick summary from Top Glove’s letter to stakeholders on the main risks I discussed in my aforementioned earlier article (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

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

In summary, the four main risks highlighted were: Fluctuations in raw material prices; currency movements; rising utility costs; and increasing levels of competition.

The following quote from Top Glove’s letter to stakeholders touches on how the company is dealing with the risks to its business (emphases are mine):

However, quality and cost efficiency enhancements via automation, computerisation and technology transformation initiatives which the Group embarked on served to mitigate the impact of these headwinds. Indeed, our approach has always been not to be unduly concerned about external factors which are beyond our control, but to focus on initiatives to offset less favourable conditions and maintain a steady performance throughout the year, which we believe have been successfully executed.”

There are a few things worth highlighting.

Firstly, I think Top Glove’s focus on what is controllable is the right approach over the long term. Secondly, the company has the right priority on the things within its control, namely, the quality of its products, and its cost efficiency; it is important for a manufacturer of a commodity-type product to produce reliable products at the lowest cost possible in order to maintain its profitability and market share in the long run.

Having the above qualities has enabled Top Glove to outperform its competitors. This is evident from its significant market share in the global gloves market.

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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.