TOP GLOVE CORPORATION - Venturing into Africa?

- A local daily today reported that Top Glove Corporation (Top Glove) is looking to establish a rubber plantation in Africa in a bid to establish its presence in the continent. Top Glove’s managing director, KM Lee, was quoted as saying that the company has been scouting for land in several African countries but has yet to make a decision.

- Other known companies in the region (specifically in Liberia) include Firestone Natural Rubber Co and Malaysia’s own Sime Darby Bhd. The former runs the world’s largest natural rubber operation there on 520sq km of land, planting 8 million rubber trees. Sime, meanwhile, has said that it will be expanding its planted rubber area to 20,000ha from a few thousand hectares presently.
This move follows Top Glove’s recent upstream venture in Indonesia. Recall, Top Glove had acquired a 95% controlling stake in PT Agro Pratama Sejahtera, which owns a 30,773ha plantation land in the south of Sumatera. The estimated investment cost for the full development over 13 years, including RM22mil of land cost, is RM450mil.

- While no indication of land size was given, we gather that land costs in the African region could be ~US$53/ha, based on Wah Seong’s recent acquisition of a plot of land in the Republic of Congo while planting costs up to maturity (6-year gestation period for rubber trees) should be around US$4,000/ha, based on Sime’s preliminary estimates for its Liberia project. (Top Glove’s Indonesia venture: ~US$4,500/ha).

- We are slightly negative on this development as we believe Top Glove may be veering off its core business as a rubber glove manufacturer.  While this undertaking may be in line with its long-term objective of securing 50% of its latex requirements internally, we are cognisant of the logistical issues involved. Management has implied that it has no plans to set up operations in the region in the immediate term and most of Top Glove’s manufacturing facilities are located in Malaysia.

- We are maintaining our BUY recommendation on Top Glove with a fair value of RM6.50/share, pending further details from management.

Source: AmeSecurities