Top Glove (TOPG MK) - Maybank Kim Eng 2018-07-09: Material Acquisition Hits A Snag

Top Glove (TOPG MK) - Maybank Kim Eng Research 2018-07-09: Material Acquisition Hits A Snag TOP GLOVE CORPORATION BHD SGX:BVA

Top Glove (TOPG MK) - Material Acquisition Hits A Snag

Potential share overhang; Downgrade to HOLD

  • It is unclear at this stage what issues have prompted Top Glove’s legal action against the vendors of Aspion.
  • Stripping out the profit guarantees would affect our FY18-19 EPS forecasts by 8/20% respectively. 
  • We maintain our earnings forecasts and Target Price of MYR12.90 (30x 2019 PER; 10% discount to our target PER for Hartalega), pending more clarity from the management.
  • Nevertheless, we downgrade the stock to HOLD (from BUY) given the reduced upside to our fair value and the uncertainties surrounding Aspion.

Claiming for > MYR715m

  • Top Glove has taken legal action against Adventa Capital Pte Ltd, Low Chin Guan, Wong Chin Toh and ACPL S/B (or essentially the vendors of Aspion S/B (Aspion)). It is claiming for a sum of not less than MYR715m, arising from a “conspiracy to defraud Top Glove” and “fraudulent misrepresentations made by Low Chin Guan and Wong Chin Toh, which resulted in Top Glove agreeing to purchase Aspion”.

Exact issues unclear at this stage

  • Recall Top Glove had, in Apr 2018, completed the acquisition of Aspion, a surgical gloves manufacturer, for MYR1.37b satisfied in cash (MYR1.23b) and shares (20.51m Top Glove shares at MYR6.68/shr). This acquisition turned Top Glove into the world’s largest producer of surgical gloves and it came with a two-year profit guarantee.
  • It is unclear what the issues are at this stage and we await further clarity. (This stock research report is shared from SGinvestors.io)
  • Our FY18-20 EPS forecasts have already imputed Aspion’s profit guarantee of MYR81m and MYR108m for FY10/18-19. Stripping this out, our FY18-19 EPS forecasts for Top Glove would be reduced by 8% and 20% respectively.

May not be all doom and gloom

  • Technically though, any shortfall in the profit guarantee is supposed to be satisfied by cash refund from the vendors. 
  • Furthermore, if Top Glove is successful in claiming back > MYR715m, its interest savings would be c.MYR22m p.a. (or 4% increase to our FY19E EPS).

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-07-09
SGX Stock Analyst Report HOLD Downgrade BUY 12.900 Same 12.900