Top Glove (TOPG MK) - Maybank Kim Eng 2018-01-15: Acquisition-led EPS Growth

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TOP GLOVE CORPORATION BHD BVA.SI

Top Glove (TOPG MK) - Acquisition-led EPS Growth

Raising EPS and TP; maintain HOLD 

• We are positive on Top Glove’s proposed acquisition of Aspion given the EPS accretion, reasonable valuation and strategic proposition.
• Incorporating for Aspion, our FY18-20E EPS is raised by 4%-11%. We also raised our 2019 PER target to 24x (from 20x; similar to our PER target for Kossan) given post-acquisition robust 2-year EPS CAGR of 23% and margin improvement. 
• Our new Target Price is MYR9.85 (from MYR7.50). Maintain HOLD.

Buying surgical glove specialist 

• Last Friday, Top Glove entered into a conditional SPA with Adventa Capital Pte. Ltd (ACPL) for the purchase of the entire equity interest in Aspion S/B (Aspion). Key details:
  1. total consideration of MYR1.37b, with 90% of the amount (or MYR1.23b) to be paid in cash and the balance (or MYR137m) to be paid in 21m new Top Glove shares (or +2% to existing share base);
  2. ACPL to guarantee a net profit of MYR81m in FY10/18, MYR108m in FY10/19;
  3. Mr Low Chin Guan will remain as the managing director of Aspion;
  4. an EGM to seek shareholders’ approval will be convened in Mar 2018 and the deal is targeted to complete in Apr 2018.

Positive on the deal 

• We believe the deal will garner enough support for it to go through as:
  1. it is EPS accretive;
  2. valuation is palatable with FY18E PER of 17x (sector average: 22x);
  3. Top Glove’s EBITDA margin may enhance by c.2-ppt;
  4. it would make Top Glove the world’s largest surgical glove player with a market share of 29%;
  5. Aspion’s average ASP is 20-30% higher than industry due to its innovative technology, such as Finessis.

Incorporating for Aspion 

• Incorporating for Aspion, our FY18-20E EPS is raised by 4%/11%/10%. We also upgrade our PER target for Top Glove to 24x (from 20x; +2SD to mean) given its:
  1. strong 2-year (FY17-19E) post-acquisition EPS CAGR of 23% and margin improvement; and
  2. greater dominance in the glove market. 
• Elsewhere, Top Glove has revised its glove ASPs upward by 6% in Dec 2017 to fully reflect the higher costs (gas tariff, foreign worker levy) and lower USD/MYR, and hence, near-term earnings could remain strong.

More details on the Top Glove’s proposed acquisition of Aspion

The purchase consideration 

• The purchase consideration would amount to MYR1.37b and the vendor, ACPL, would guarantee FY10/18-19 net profit of MYR81m and MYR108m respectively. This implies acquisition PER of 17x for FY18E and 13x for FY19E, much lower than sector’s average PER of 22x for 2018E and 19x for 2019E.
• In addition to the purchase consideration, Top Glove will pay the vendor “Finessis Incentive”, calculated from the net profit to be derived from the sale of Finessis Gloves in FY18-20. Note that the vendor’s guaranteed profits for Aspion do not include earnings from Finessis Gloves.
• Finessis Gloves is a highly-innovative surgical glove with “Molecular Layer Technology” and has disinfecting gel in the middle layer of the gloves. Aspion markets Finessis Gloves as the world’s safest surgical gloves as it has Acceptable Quality Level (AQL; pinhole defects in gloves) of only < 0.1, substantially lower than industry’s 0.65.
• For illustrative purpose, assuming the Finessis Gloves make a net profit of MYR5m in FY18, Top Glove will have to pay MYR17m (MYR5m net profit x 20% x 17x acquisition PER) to the vendor. The amount will be paid in cash and Top Glove will capitalise it on its books. We have yet to include the “Finessis Incentive” into our revised earnings forecasts/valuation as we have also not incorporated any earnings contribution from the Finessis Gloves.

Mode of payment and funding 

• The purchase consideration of MYR1.37b would be satisfied via:
  1. cash payment of MYR1.23b (or 90% of the acquisition value) to ACPL. Southern Capital owns a 56.5% equity stake in ACPL while Mr Low Chin Guan (founder and managing director of Aspion) owns the remaining 43.5%;
  2. the remaining MYR137m (or 10% of acquisition value) would be satisfied via the issuance of 21m new Top Glove shares (at MYR6.68/share) to Mr Low Chin Guan. The issuance of new shares would only increase Top Glove’s share base by 2%. 
• As Top Glove’s net cash position is low at MYR33m (as at 30 Nov 2017 and after imputing for the acquisition of Eastern Press for MYR47m cash on 5 Jan 2018), the cash payment of MYR1.23b would be fully funded by a USD loan, which has an interest rate of 2.4-2.8% (subject to fluctuation of LIBOR). We have assumed for interest rate of 3% in our earnings forecasts. The decision for a USD loan (vs. MYR loan) is due to a lower cost of financing. 
• Following this acquisition, we estimate that Top Glove will turn net debt with a net gearing of 65% by end-FY8/18, after incorporating also Aspion’s proforma net debt of MYR264m as at end-FY10/16 [figures for end-FY10/17 not available yet). 
• Most importantly, the stock will remain in Securities Commission’s Shariahcompliant list as half of the new borrowing for the acquisition will be based on Murabahah term financing. 

Other important information 

Robust earnings growth potential 

• In FY10/16, Aspion registered a strong core net profit growth of 82% y-o-y to MYR62m versus Top Glove’s +29% y-o-y to MYR361m (FY8/16). Aspion’s EBITDA margin of 22% was also 4-ppt higher than that of Top Glove’s 18%. 
• Aspion 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, Aspion expects sales volume growth of 18-20% in FY10/18. Thus, we believe Aspion could achieve its target/guarantee net profit of MYR81m in FY10/18

Lee Yen Ling Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-01-15

Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.85 Up 7.50