Top Glove Corporation - CIMB Research 2018-01-15: Remain Positive On Acquisition Of Aspion

Top Glove Corporation - CIMB Research 2018-01-15: Remain Positive On Acquisition Of Aspion TOP GLOVE CORPORATION BHD BVA.SI

Top Glove Corporation - Remain Positive On Acquisition Of Aspion

  • TOPG’s briefing mainly focused on its 1QFY8/18 results and purchase of Aspion.
  • Its strong 1QFY18 core net profit of RM101m (+37.7% y-o-y) can be attributed to robust sales growth (+17% y-o-y) and higher economies of scale.
  • TOPG believes that sales volume of gloves should remain strong in 2018 on higher usage in emerging markets and as a substitute given lower vinyl supply in China.
  • We raise our FY18-20F EPS by 3-20% to reflect Aspion’s earnings contribution to the group.
  • Maintain ADD on TOPG, with a higher target price of RM10.00, now based on 22.4x CY19F P/E vs. 19x previously, a 20% discount to our target P/E for Hartalega (28x).

A well-attended briefing 

  • TOPG’s 1QFY8/18 briefing last Friday was well attended, with 80 people present. TOPG was represented by Chairman Tan Sri Lim Wee Chai, Managing Director Mr. Lee Kim Meow and Executive Director Mr. Lim Cheong Guan. Aspion’s Managing Director Mr. Low Chin Guan was also present to take any questions on Aspion. 
  • We remain positive post the briefing, which centred on:
    1. TOPG’s robust 1QFY18 results,
    2. growth plans,
    3. details of the Aspion acquisition, and
    4. Aspion’s product range and capabilities.

Robust glove demand drove 1QFY18 net profit up 43.9% y-o-y 

  • TOPG’s solid 1QFY18 core net profit of RM101m (+37.7% y-o-y) can be attributed to higher sales volume (+17% y-o-y) and an increase in selling prices (+2% y-o-y). This was despite a spike in raw material prices (latex: +12% y-o-y; nitrile butadiene: +3% y-o-y) and a weaker US$/RM (-0.1% y-o-y). 
  • Moving forward, management expects demand for gloves to remain strong in 1H18. Shortage of China-made vinyl gloves should persist in the near term due to the wintering period and the insufficient supply of natural gas.

Acquiring Aspion for RM1.4bn plus incentive payments 

  • TOPG also announced it had entered a sales and purchase (S&P) agreement for Aspion. The base acquisition price is RM1.4bn, valuing Aspion at 16.9x P/E on FY18F target net profit. The vendors provide a profit guarantee of RM100m over 2 years to compensate for any shortfall in the net profit targets of RM81m in FY18 and RM108m in FY19. 
  • However, the acquisition price may increase on potential incentive payments in FY18-20F based on profit after tax of Finessis product sales (a new surgical glove range launched in 2017).

Positive on the various synergies from the acquisition of Aspion 

  • We remain positive on TOPG’s purchase of Aspion, targeted for completion by Apr 2018. Besides being earnings-accretive, this acquisition will make Top Glove the largest surgical glove maker globally. Also, TOPG can tap Aspion’s technological know-how in the surgical glove space to produce higher-margin and better quality gloves. 
  • In addition, TOPG will have access to Aspion’s key developed markets, such as Japan, Europe and North America; the bulk of TOPG’s surgical glove sales is to emerging markets.

Maintain ADD, with a higher Target Price of RM10.00 

  • We raise our FY18-20F EPS by 3-20% to reflect the earnings contribution from Aspion.
  • Our revised forecasts incorporate:
    1. contribution from Aspion’s production facilities,
    2. issuance of 20.5m new shares (0.02% of existing share base), and
    3. higher interest costs from debt that has been raised for this acquisition. 
  • Accordingly, our target price rises to RM10.00, now based on 22.4x CY19F P/E (20% discount to our target P/E (28x) for Hartalega). 
  • Downside risks are termination of the acquisition and/or weaker US$/RM.

Key details of the purchase consideration for Aspion 

Purchase consideration of RM1.4bn to mainly be funded by borrowings 

  • In an announcement on Friday, TOPG stated that it has formally entered into an S&P agreement to purchase Aspion Sdn Bhd from Adventa Capital Pte Ltd. The value of the acquisition is RM1.4bn, which will be funded through:
    1. issuance of 20.5m new shares with a total value of RM137m (issue price per Top Glove share: RM6.6813), and
    2. borrowings of RM1.2bn (90% of purchase value). 
  • This purchase amount values Aspion at 16.9x P/E of FY18F’s targeted profit after tax (PAT) of RM80.9m (Oct year-end). The group aims to fund the acquisition via US$310m debt, with an average interest rate of 2.7%. The debt will be made up of a combination of a murabahah term loan (US$155m) as well as a conventional term loan (US$155m). Note that the issuance of 20.5m new shares is estimated to have a very minimal dilution impact of ~0.02% on the existing share base.

Vendors to cover for any shortfall in FY18-19F core PAT target by up to RM100m 

  • As part of the conditions of the purchase consideration, the targeted profits after tax (PAT) for Aspion are RM80.9m in FY18 and RM108.3m in FY19. To ensure that the PAT targets in both years are achieved, the vendors of Aspion will provide a guarantee of up to a maximum of RM100m to offset any shortfall in the targeted core PAT for FY18-19F. 
  • In the event of any shortfall, the vendors will repay the shortfall amount in cash. 

… with potential incentive payment of FY18-20F 

  • Finessis’s profit after tax Besides the acquisition value of RM1.4bn, TOPG will also have to pay additional incentive payments for the period of FY18-20F. The incentive payment will be mainly based on the profit after tax derived from the sale of any surgical gloves manufactured using Flexylon™ polymer and related manufacturing processes and technologies, which are currently marketed under the ‘Finessis’ range. 
  • Finessis is Aspion’s latest top-of-the-class range of surgical gloves that was launched in 2017. We gathered that the intention behind the Finessis incentive is to drive Aspion’s vendors to roll out more products in this range, which has higher margins.
  • The potential values of the incentives based on these two fixed conditions:
    1. implied acquisition P/E multiple of 16.9x, and
    2. percentage sharing of PAT from Finessis products of 20%/30%/50% for FY18F/19F/20F. 
  • We gathered that the annual payment of incentives will be recognised as investment cost in the group’s balance sheet. We have yet to assume any incentive payments in our capex assumptions for FY18-20F pending further details post the official signing of the S&P.

Potential recognition of goodwill 

  • In addition, TOPG expects to recognise goodwill from this proposed acquisition. The total amount of goodwill has yet to be determined and will be based on the fair value of Aspion’s total assets and liabilities acquired (at the completion date of this acquisition) as well as the estimated total Finessis incentive that is due to the vendor. 
  • At this juncture, TOPG’s management is confident that there are unlikely to be any impairment losses.

Aspion’s owner to stay on as managing director or special adviser up to FY20 (Oct year-end) 

  • Post this acquisition, Aspion’s current Managing Director Mr. Low Chin Guan will be appointed as the managing director or special adviser for the Aspion Group up to FYE 31 October 2020. We view this positively as this arrangement will provide ample time to ensure the proper transition of the group’s management.
  • Upon the completion of this acquisition, Mr. Low is also expected to be appointed as an Executive Director on the board of Top Glove Corporation. We gathered that Mr. Low will be a shareholder of TOPG through the 20.5m new shares that will be issued as part of the payment for the acquisition of Aspion.

Key background details on Aspion 

Overview on Aspion 

  • One of the largest manufacturers of surgical gloves by capacity with around 17% global market share.
  • Full spectrum product portfolio with broad range of price points.
  • In 120 countries, with approximately 90 distribution partnerships.
  • 3 factories, including high-tech Kulim facility, with around 2800 employees.
  • In-house R&D capabilities and market innovator with new products.
  • High growth business, with FY14-16 volume CAGR of approximately 21%.

Current production capacity is 4.6bn pieces annually; to expand by 30% by end-2019 

  • As at Dec 17, Aspion had a total production capacity of 4.6bn gloves annually. This is made up of 21.7% natural rubber, 45.7% nitrile and 32.6% surgical gloves. The group currently operates three factories (Kulim, Kota Bahru and Kluang) with a workforce of 2,800 employees. 
  • Moving forward, Aspion aims to grow its production capacity further, especially in the surgical glove segment. It aims to expand its total production capacity by 30.4% to 6bn pieces annually by end-2019. 
  • We view this positively as Aspion’s surgical gloves fetch higher profit margins than TOPG’s.

16 types of surgical glove products, including Finessis 

  • Currently, Aspion has 16 types of surgical glove products. The group mainly focuses on the mid-range segment, with a total of 10 products here. In the premium segment, Aspion has Finessis, which was launched in 2017. 
  • Finessis is the group’s latest product and is made using a molecular layer technology process with Flexylon™ polymer, a proprietary high performance synthetic polymer material that was developed in-house. We gather that this material is able to the mimic the physical attributes of natural rubber latex without the drawbacks of latex proteins and chemical accelerators. Also, this is the only surgical glove range in the world that is sterilised using electron beaming.

Reasons for this acqusition 

Earnings-accretive acquisition 

  • Based on our estimates, this acquisition is expected to increase TOPG’s FY18- 20F net profit by 3.0-20%. This is after taking into account the higher interest costs and a larger share base. 
  • Given that Aspion mainly focuses on the higher margin surgical glove range, we believe that TOPG’s net EBITDA margins could increase by 2.0-2.5%. However, we also note that TOPG will turn from a net cash company into one with a net gearing ratio of 0.6x, which is healthy, in our view, given the size of the acquisition.

Becoming the world’s largest surgical glove manufacturer 

  • Based on a study by Frost and Sullivan in 2016, Aspion is ranked as the second largest surgical glove manufacturer globally, with 17% market share, behind Ansell (21%). On the other hand, TOPG was ranked as the fourth-largest surgical glove manufacturer, with 12% market share. 
  • Post this acquisition, TOPG will become the world’s single largest surgical glove maker by volume, with an estimated market share of 29%. This will allow TOPG to further compete with MNCs in the surgical space given its larger production size and enhanced manufacturing capabilities. 
  • Also, TOPG believes it could secure long-term contracts from its existing competitors as more of them are shifting away from manufacturing to focus more on marketing and distribution.

Various other synergies available 

  • Besides the earnings-accretive nature of the deal, we believe that TOPG will benefit from various other synergies from this acquisition. As Aspion mainly specialises in surgical gloves, TOPG will have access to a wider range of surgical glove products while gaining technological know-how that will allow it to produce higher-margin and better quality surgical gloves. This acquisition will also include 50 patents and trademarks, including latest R&D developments, especially the Finesses range of products. 
  • In addition, TOPG will be able to tap Aspion’s key developed markets, such as Japan, Europe and North America; the bulk of TOPG’s surgical glove sales is mainly to emerging markets.

Walter AW CIMB Research | http://research.itradecimb.com/ 2018-01-15
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