Top Glove Corporation - CIMB Research 2017-11-27: The Largest Global Glove Maker Just Got Bigger

SGinvestors.io

TOP GLOVE CORPORATION BHD BVA.SI

Top Glove Corporation - The Largest Global Glove Maker Just Got Bigger

• Top Glove Corporation has entered into a term sheet to acquire Aspion Sdn Bhd, a specialised surgical glove manufacturer, from Adventa Capital, for an estimated RM1.3bn-1.4bn.
• Positive on this potential acquisition given:
  1. its earnings accretive nature,
  2. potential synergies, and
  3. it will add to Top Glove's manufacturing capabilities.
• With this acquisition, Top Glove will be the largest surgical glove maker globally in terms of volume. It will also provide Top Glove with access to key developed markets.
• This acquisition will be satisfied through issuance of new shares of not more than 10% of the purchase price and the remainder by bank borrowings.
• Based on our estimates, this potential acquisition could raise FY18-20F EPS by 3.9- 13.6%. This will add another 11.2-12.2% upside to our existing target price of RM6.90.

Acquiring Aspion Sdn Bhd for an estimated RM1.3bn-1.4bn 

• Top Glove (TOPG) is acquiring a 100% stake in Aspion Sdn Bhd from Adventa Capital Pte. Ltd. The purchase price is estimated to be RM1.3bn-1.4bn, based on:
  1. profit of RM80m in FY18F,
  2. seller to reimburse in the event of a shortfall in FY18F target net profit, and
  3. P/E of 16-18x on FY18F target net profit. 
• Top Glove aims to complete this acquisition by Feb 2018 and it will be funded through the issuance of new shares of not more than 10% of the purchase price and remainder by borrowings (US$ term loans).

Aspion Sdn Bhd is the world’s 2nd largest surgical glove producer 

• Aspion is estimated to be the second-largest surgical glove maker globally in terms of volume. It produces a wide range of glove types, including examination gloves. Currently, it has 3 production facilities (Kulim, Kota Bharu and Kluang) with a capacity of 5bn p.a. The company is in the midst of expanding capacity by 24.4%, mainly in the surgical glove segment, which should be completed by end-2019F. 
• Currently, Aspion’s key markets are mainly developed markets, i.e. North America, Europe and Japan.

Potentially raising FY18-20F EPS by 3.9-13.6% 

• We view this acquisition positively as it is earnings accretive based on the indicated purchase price range. 
• After accounting for higher interest costs and a larger share base (10% purchase consideration to be satisfied by cash), our back-of-the-envelope calculations indicate that Top Glove's FY18-20F EPS could still increase by 3.9-13.6%. 
• We also note that Top Glove will turn from a net cash company to one with a net gearing ratio of 0.5-0.6x, which remains healthy, in our view, given the size of the acquisition.

TOPG to benefit from various synergies available 

• As Aspion specialises in surgical gloves, Top Glove will have access to a wider range of surgical glove products while gaining technological know-how that will allow it to produce higher margins and better quality surgical gloves. This acquisition will also include 50 patents and trademarks, including latest R&D products. 
• In addition, Top Glove will be able to tap into Aspion’s key developed markets, such as Japan, Europe and North America; the bulk of Top Glove's surgical glove sales are to emerging markets.

Maintain Add; may add 11.2-12.2% upside to our TP of RM6.90 

• We have yet to incorporate the potential earnings accretion into our estimates pending the completion of this acquisition. If reflected, the potential upside to our target price is 11.2-12.2%, bringing our would-be TP to RM7.67-7.74. 
• Hence, we maintain our Add call on the stock but keep our TP unchanged at RM6.90, still based on 19x CY19F P/E (+1 s.d. from 5-year historical mean). 
• Downside risks to our view include a sharp weakening of US$/RM and termination of this proposed acquisition.

Global value for surgical gloves in 2015 was US$1.4bn 

• According to Top Glove, the global demand for surgical gloves in 2015 stood at 4bn pieces p.a. in terms of volume, with a market value of US$1.4bn. 
• Moving forward, global demand is expected to post an 8% CAGR to reach 6bn pieces p.a. by 2020F. 
• Currently, key growth markets for surgical gloves are mainly developed markets where there are more stringent healthcare regulations, such as in North America, Europe and specific parts of Asia Pacific and the Middle East. However, we believe that demand from emerging markets will continue to rise in tandem with higher healthcare awareness.

Walter AW CIMB Research | http://research.itradecimb.com/ 2017-11-27

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 6.90 Same 6.90