Top Glove Corporation - CGS-CIMB Research 2020-03-03: A Beneficial Compromise


Top Glove Corporation - A Beneficial Compromise

  • Top Glove announced that it has reached a full and final settlement of RM245m with Adventa parties over the acquisition of Aspion in Apr 2018 for RM1.4bn.
  • To recap, Top Glove sued Adventa parties for > RM715m for conspiring to defraud it over this acquisition via overstatement and overvaluation.
  • The settlement amount will lower Top Glove’s current net gearing level to 0.78x from 0.86x as of 2QFY8/20. This will have no impact on its income statement.

A settlement of RM245m on legal actions for acquisition of Aspion

  • In a recent Bursa announcement, Top Glove (SGX:BVA) said it has settled with Adventa and its directors (Adventa Capital, ACPL Sdn Bhd, Low Chin Guan, Wong Chin Toh and Kwek Siew Leng) over legal actions in respect of its purchase of Aspion from Adventa in Apr 2018. Top Glove will receive RM245m as full and final settlement, with no admission of liability by any party and no liberty to file afresh legal actions.
  • The settlement value will be nett off against the cost of investment and goodwill, with the proceeds used to pare down its current borrowings. We do not expect any impact on Top Glove’s income statement.

A recap on the acquisition of Aspion

  • Top Glove acquired Aspion in Apr 2018 for RM1.4bn (RM1.2bn cash and RM137m - 20.5m TOPG shares), valuing Aspion at 16.9x FY18F P/E (based on a net profit guarantee of RM81m in FY18). On 9 Jul 18, Top Glove announced that it had filed a legal suit vs. Adventa to claim > RM715m due to irregularities in Aspion’s balance sheet (overstatement of inventory, plant and machinery by RM74m and acquisition price by RM641m).

Positive news in our view

  • In our view, this is positive news. While the settlement price is only 35% of the claim amount, this allows Top Glove to focus solely on its businesses and clear any uncertainties surrounding this legal case.
  • As we nett off the settlement amount from Top Glove’s acquisition of Aspion, the purchase is now valued at 26.8x (based on our FY8/20’s net profit target for Aspion of RM30m), a 9% discount to Top Glove’s current FY20 P/E.

Witnessing a surge in demand for gloves from Covid-19 outbreak

  • On the recent Covid-19 outbreak, Top Glove stated that it has seen a surge in glove orders from affected countries, such as China, South Korea, Italy and etc. We also gather that it has been able to raise its ASPs to pass on cost increases (labour, etc.), indicating that the sector’s supply-demand dynamics have turned favourable towards glove makers, such as Top Glove. This should be reflected in Top Glove’s results at the beginning of 3QFY20.

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Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-03
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