KUALA LUMPUR: PublicInvest Research is neutral on the announcement of Top Glove Corporation Bhd's unit Top Glove Sdn Bhd entering a joint venture with Japanese company Fimatec Ltd even though the JV could result in cost reductions in glove manufacturing for the former.
The house is of the opinion that, although the JV company Techniglove Asia Sdn Bhd (to be renamed TG FMT Sdn Bhd in due course) will produce rubber reinforcing agent for use in gloves manufacturing and will result in cost savings in the long term, however, there is "mounting cost pressures and a recent surge in average natural rubber latex prices".
Hence, PublicInvest Research explains that the deal is not a catalyst for a re-rating and the research firm is maintaining its neutral call with unchanged target price of RM4.62 for Top Glove Corporation.
"This is a long-term investment plan for Top Glove Group, whereby it aims to reduce the overall glove production cost, improve glove quality and production efficiency through the supply of good and consistent quality of rubber reinforcing agent," explained PublicInvest Research in its report as the rationale for the setting up of the JV.
The deal will be funded via internally generated funds and borrowings with the JV seeing TGSB subsribing up to RM4.2 million of the paid-up capital of Techniglove while Fimatec would subscribe up to RM1.8 million, PublicInvest Research said.
"Meanwhile, we expect 2017 to be a year of continuing internal cost management through efficiency enhancements such as automation processes, while managing external factors such as higher raw material prices, forex effects, hikes in natural gas prices and labour costs," the report said.