Top Glove (TOPG MK) - UOB Kay Hian 2018-07-09: Seeking Legal Recourse After Being Duped

TOP GLOVE CORPORATION BHD SGX: BVA

Top Glove (TOPG MK) - Seeking Legal Recourse After Being Duped

The legal proceedings against Adventa Capital are a negative development as it goes to show there may be something wrong with Aspion and its price tag of RM1.4b could be overly inflated. For now, in-depth details are scarce and management is rather tight-lipped on the situation.
Nevertheless, Top Glove remains the second-priciest proxy to the sector.
Maintain SELL and target price of RM8.40.

Top Glove announced it will be taking legal proceedings against the previous owner of Aspion, i.e. Adventa Capital for a sum of RM715m. Management claims fraudulent misrepresentations, which resulted in Top Glove agreeing to acquire Aspion at a perceived inflated amount of RM1.4b. (This report is shared from SGinvestors.io)

The deal was completed in early-April this year, transforming it to become the largest surgical glove company in the world.

We understand Adventa Capital furnished misleading information (management is mum on this) to Top Glove during the due diligence exercise and this has led to the deal materialising at RM1.4b. Also, we gathered the acquisition cannot be rescinded (since the transaction has closed) and Aspion will continue to remain as a fully owned subsidiary of Top Glove. Beside these, not much else was shared with us.
That said, there is a possibility of a one-off impairment charge relating to this unfortunate incident and the FY18-19 (Oct) profit guarantee of RM81m-108m by Adventa Capital may no longer hold as well.
Considering that this legal proceeding involves Mr Low Chin Guan (the brain of Aspion and co-owner of Adventa Capital), we are unsure whether this would affect newer product development as he is actively involved in the process, particularly in technological directions (based on publicly available information).
Management will be hosting an analyst briefing later today to address investors’ concerns.

Assuming the impairment charge is RM715m (as this is the amount Top Glove is looking to salvage from Adventa Capital), we estimate Top Glove’s book value per share of RM1.77 as at 3QFY18 may decline by 32% to RM1.21.
In an extreme bear scenario, if we were to strip away Aspion’s financial contribution from our projections, Top Glove’s FY19-20 bottom-line forecasts are expected to fall by 22% to 85m (from RM562m-621m).

No changes to our estimates for now, pending more clarity from management.
Key upside risks include:
1. recovering the RM715m from Adventa Capital,
2. market share gains,
3. more bona fide sizeable value-accretive M&As, and
4. US dollar appreciating markedly against the ringgit.

Top Glove remains the second-priciest proxy to the sector. Also, it is trading at more than +2SD above its 5-year forward PE and the risk-reward profile is unfavourable.
Maintain SELL and target price of RM8.40, based on 18x 2019F PE. This is +0.5SD above its 5-year forward mean PE of 16x but below the sector’s 29x. The premium is fair as:
1. Top Glove has been making steady headway into the generally faster-growing nitrile glove space, and
2. despite the new negative development at Aspion, the group is still touted as the no.1 surgical glove player globally.
That said, the discount to the glove sector is warranted, considering its relatively stretched balance sheet (net gearing of 0.8x vs peers’ average of 0.1x). Likewise, our PE-ROE regression analysis suggests pegging the stock at 18-20x forward PE.
Post-bonus issue, our target price would be RM4.20, excluding the potential dilution from full guaranteed exchangeable bonds conversion into new Top Glove shares pending more details of the exercise. (This report is shared from SGinvestors.io)

Chan Jit Hoong CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-09

SGX Stock Analyst Report SELL Maintain SELL 8.400 Same 8.400