Top Glove (TOPG MK) - Maybank Kim Eng 2017-11-27: Buying Surgical Glove Specialist

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TOP GLOVE CORPORATION BHD BVA.SI

Top Glove (TOPG MK) - Buying Surgical Glove Specialist

Earnings accretive acquisition 

• We are positive on Top Glove’s proposed acquisition of Aspion because: 
  1. Aspion is a surgical glove specialist with cutting-edge technology which Top Glove has been unsuccessful in developing;
  2. the acquisition will enhance Top Glove’s margins/ROE;
  3. the acquisition will be EPS accretive given the low borrowing cost. 
• Maintain our EPS forecasts, HOLD call and TP of MYR6.20 for now (20x 2018 PER, +1SD to mean). Top Glove presently trades at 22x 2018 PER.

Buying Aspion at FY10/18E PER of 16-18x 

• Top Glove has entered into a term sheet with Adventa Capital Pte Ltd to acquire the entire equity interest in Aspion S/B. Key details in the term sheet are:
  1. Vendor to guarantee a net profit of > MYR80m for FY10/18E (FY10/16: MYR64m core net profit);
  2. transaction PER target to be 16- 18x, indicating purchase consideration of MYR1.28-1.44b;
  3. transaction to be satisfied via a combination of cash and the issuance of new ordinary Top Glove shares (< 10% in value of the purchase consideration). 
• Separately, the transaction could complete by Feb 2018.

A surgical glove specialist 

• Unlike Top Glove which produces surgical gloves for general surgery, Aspion’s surgical gloves are more specialised and hence command higher margins. 
• Moreover, Aspion also has cutting-edge technology; for example, its Finessis surgical glove is the only technology capable of reducing the number of enveloped viruses (i.e. HIV) transferred in case of a percutaneous injury. 
• Upon acquisition, Top Glove will be the world’s largest surgical glove supplier with a market share of c.29% (c.12% now). 

To lift EPS and margins 

• Top Glove will be taking up a USD loan with interest cost of 2.5-3%. 
• Based on a debt:equity ratio of 90:10, we estimate that this proposed acquisition will raise Top Glove’s EPS by 9-10%. 
• The acquisition will also lift Top Glove’s surgical glove segment’s gross margin by 5-10-ppt and group’s overall margin by 0.4-0.8-ppt, we estimate. 

More on Aspion 

Privatised in 2012 

• Aspion was privatised by Mr Low Chin Guan (founder and Managing Director of Aspion and Adventa Berhad) and Southern Capital (an Asia-based private equity firm) in 3Q12 for MYR321m (implying 12x forward PER). 
• Presently, Mr Low Chin Guan owns 44% of equity stake in Aspion while Southern Capital owns the balance 57% equity stake. Upon the disposal to Top Glove, we believe Mr Low Chin Guan will stay on to lead Aspion and hold c.2% of Top Glove’s enlarged share base (representing 10% of the MYR1.28-1.44b transaction) while Southern Capital will exit Aspion completely. 

Expanding capacity 

• Aspion’s manufacturing facilities are located at Kluang (Johor), Kulim (Kedah) and Kota Bahru (Kelantan). It has a total capacity of 4.8b pcs p.a. (or 9% of Top Glove’s 51.9b pcs capacity) and it aims to raise its capacity to 6b pcs by FY10/19 (+25% from now). 
• Though its capacity is skewed towards examination glove (70% capacity in examination), revenue is predominantly derived from its surgical gloves because ASP of surgical gloves is > 3x higher than that of examination gloves. 

Innovative and strong technical know-how 

• Aspion’s attractiveness lies in its innovative new technologies and know-how in surgical glove manufacturing processes and materials, which Top Glove has been unsuccessful in developing. Aspion possesses a substantial intellectual property portfolio with 50 trademarks and patents registered in major countries (i.e. US, Europe and Japan). 
• Comparing to Top Glove (presently produces surgical gloves for general surgery application), Aspion has a wider range of specialised surgical gloves, catering to different types of medical practise areas (i.e. high risk surgery, micro-surgery, orthopaedics, obstetrics and gynaecology). Hence, we think this would expand Top Glove’s product offering and make Top Glove an even stronger “one stop centre’”. 
• Additionally, Top Glove will have access to Aspion’s new cutting-edge technological know-how, using a new breakthrough synthetic material, namely Flexylon (a high performance synthetic polymer that mimics natural rubber physical attributes without the drawbacks of latex proteins and chemical acelerators). 
• We also understand that Aspion’s Finessis surgical glove (small earnings contribution to Aspion now) could be a strong driver to its surgical business in future. Finessis surgical glove’s reactive technology is the only technology capable of reducing the number of enveloped viruses (i.e. HIV) transferred in case of a percutaneous injury. This technology also provides a higher safety for users as the disinfecting liquid is not into contact with the wearer’s skin when the glove is intact. 

Access to developed markets 

• Approximately 35% of Aspion’s surgical gloves are sold to developed countries (North America, Europe and Japan), which Top Glove does not sell to. Hence, the acquisition will provide Top Glove the immediate access into the developed markets. 
• Moreover, upon acquisition, Top Glove will be the world’s largest surgical glove supplier with market share of c.29% (c.12% now). Acquisition of Aspion will also result in higher surgical gloves volume mix for Top Glove to 4% (from 2% now) and higher revenue contribution to 13% (from 5% now). 

Robust earnings growth 

• In FY10/16, Aspion registered strong core net profit growth to MYR62m (+82% YoY) versus Top Glove’s +29% YoY to MYR361m (FY8/16) and Aspion’s EBITDA margin of 22% was also 4-ppt higher than that of Top Glove (FY8/16: 18%). It recognised a massive inventory write-off of MYR32m in relation to its X-ray gloves, whereby a change in regulation has made the material it used for its Xray gloves unfit, we understand. 
• Given its capacity expansion plan and the healthy surgical glove demand, we believe Aspion could achieve its target net profit of MYR80m in FY10/18. 
• Additionally, we understand that Aspion has also guaranteed for net profit of MYR110m in FY10/19 (+38% YoY). 

Impact on Top Glove 

• We work out the P&L impact of the acquisition of Aspion on Top Glove. As for the balance sheet impact, we estimate that Top Glove’s proforma net cash of MYR71m as at end-Aug 2017 to turn net debt of MYR1.52- 1.68b (or net gearing of 71-78%) after including:
  1. the 90% debt financing for the acquisition;
  2. its recent acquisition of Eastern Press S/B for MYR47m;
  3. existing net debts on Aspion of MYR264m (end-FY10/16); and
  4. an enlarged share base for Top Glove to fund the balance 10% of the acquisition value. 
• Top Glove’s existing shareholders’ stake in the group will dilute a little with Mr Low Chin Guan to hold c.2% of Top Glove’s enlarged share base.

Lee Yen Ling Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-11-27

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