15 September 2012
TOP Glove Corp Bhd became the first rubber glove maker to move upstream by acquiring its own rubber plantation land to ensure a consistent supply of latex.
In June, it paid RM22mil for a 95% stake in PT Agro Pratama Sejahtera for some 30,000ha of green field rubber plantation land in Indonesia.
Assuming that the land is fully planted, it will provide up to 50% of Top Glove's current latex consumption.
Lim: ‘We are confident that investing in both upstream and downstream activities will generate more productivity and income. Thus, we are able to enhance our shareholders’ value and wealth.’
Top Glove's current capacity is 40 billion pieces of gloves per year.
At for the purchase price of RM22mil, it translates to RM715 per ha, which is also 35% cheaper than rubber land in Cambodia, according to AmResearch.
As Top Glove's target is to secure up to 40% of its its own latex supply,chairman Tan Sr Lim Wee Chai says the company will continue to source for other suitable plantation land in and around the region.
Top Glove's rationale for moving upstream is to mitigate the volatility of future rubber prices and its financial performance.
While there are some analysts who feel that Top Glove is better off spending its money on branding and improving its processes, Lim disagrees.
He acknowledges that rubber planting is a high capital expenditure game with a long gestation period.
However, he also feels that Top Glove's situation is different as it has the size, volume and cashflow. The company has cash of RM300mil.
Other rubber glove manufacturers may not be able to undertake this capital intensive project, as they have yet to achieve scale.
An analyst agrees. She says that Top Glove's move will mitigate some risk whether or not latex prices are high.
“Buying the land is more to mitigate risk rather than to make money. If latex prices are high, Top Glove benefits because it will have in-house supply of rubber to smoothen its earnings.
“When latex prices are low, it will also continue to benefit, as it can buy from the open market or use its own supply,” says the analyst.
She adds that Top Glove has a strong balance sheet and has the financial muscle to undertake this project.
For smaller players to have their own rubber plantation land may be considered risky.
The analyst from AmResearch estimates the acquisition will sufficiently meet 35% to 40% of Top Glove's latex requirements.
Latex accounts for 60% of Top Glove's total operating costs during its third quarter ended May 31.
Top Glove has allocated RM450mil for the rubber plantation project over 13 years, and this is inclusive of land cost, clearing, preparation, infrastructure, seedlings and maintenance up to maturity stage.
“Our plan is to spread the planting in stages over eight years and with a gestation period of six years before maturity.
“The total development will span over 13 years. So it is not that expensive as it is spread out over 10 years. More importantly, if we do not start now, even in 20 years we still have nothing. Zero. We must start somewhere. We are in the business for the long term,” says Lim.
The analyst points out that all glove companies have different strategies.
Some choose to improve their branding while in Top Glove's case, it is always the leader in capacity and volume. Thus, based on these targets, having its own rubber plantation land will be in the right move.
Lim adds that the RM450mil capital expenditure outlay will be spent over 13 years, averaging RM35mil per year.
“This can be funded using internal funds. Keep in mind, after seven years, the initial planting will be harvested and eventually it could be self-funded by the plantation project itself. We expect to see results from year seven onwards once our initial planting is harvested,” says Lim.
On this note, Lim adds that branding and improving processes are also the company's priority, and Top Glove continues to invest in research and development as well as marketing.
“We are confident that investing in both upstream and downstream activities will generate more productivity and income. Thus, we are able to enhance our shareholders' value and wealth,” says Lim.
[Source]
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