Top Glove (TOPG MK) - Maybank Kim Eng 2018-02-02: Priced-in Acquisition Of Aspion

Top Glove (TOPG MK) - Maybank Kim Eng 2018-02-02: Priced-in Acquisition Of Aspion TOP GLOVE CORPORATION BHD BVA.SI

Top Glove (TOPG MK) - Priced-in Acquisition Of Aspion

Acquisition-led EPS growth priced in; maintain HOLD 

  • Incorporating for Aspion, we project robust 3-year (FY17-20) EPS CAGR of 18% for Top Glove. Trading at its one-year forward PER of 26x (above +2SD to mean), we think the market has priced in Top Glove’s strong EPS growth ahead and its rising dominance in the glove market. 
  • We maintain our earnings forecasts, HOLD call and Target Price of MYR9.85 (24x 2019 PER; +2SD to mean).

2QFY18: Expect weaker-to-flattish q-o-q growth 

  • 2QFY18 results would be released in Mar 2018 and we expect weaker-to-flattish QoQ earnings as volume growth of c.5% q-o-q could be offset by weaker margins, a result of higher production cost (gas, foreign worker levy) and weaker USD/MYR. 
  • While the ASPs of latex glove were raised by c.8% in Dec 2017, the ASP of its nitrile glove remains unchanged given the shorter sales lead time of 40-50 days now (2HCY17: 60 days).

Positive on acquisition of Aspion 

  • The EGM to seek shareholders’ approval on the proposed acquisition of Aspion will convene in Mar 2018 and the deal is targeted to complete in Apr 2018. 
  • We like Top Glove’s proposed acquisition of Aspion as:
    1. it is EPS accretive;
    2. the acquisition valuation (FY18F: 17x PER, FY19F: 13x) is palatable (vs. sector average: 22x PER);
    3. it will make Top Glove the world’s largest surgical glove player with a market share of 29%;
    4. Top Glove will gain access to Aspion’s innovative technology - Finessis.

Projects 3-year EPS CAGR of 18% 

  • Our EPS forecasts have incorporated for 4-month earnings contribution from Aspion in FY18 and full-year contribution in FY19-20, which resulted in our robust 3-year EPS (FY17-20) CAGR forecast of 18%. 
  • Overall, our projected EBITDA margin is higher by 1.5-2.2-ppt in FY18-20 (from FY17) because of the higher margin from Aspion. 
  • We estimate that Top Glove will have a net gearing of 65% by end-FY18, but it will remain in the Securities Commission’s Shariah-compliant list as half of the borrowing for the acquisition will be based on Islamic term financing.

Lee Yen Ling Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2018-02-02
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 9.85 Same 9.85