Top Glove - CGS-CIMB Research 2021-02-28: Negative On Its Primary Dual Listing On HKEX


Top Glove - Negative On Its Primary Dual Listing On HKEX

  • Top Glove is proposing to issue up to 1.5bn new shares (raising RM7.7bn, including over-allotment of RM200m shares) with a dual primary listing on HKEX.
  • We are negative on this news given the dilutive impact of the exercise. We estimate our FY21-23 earnings per share could be diluted by 11.2-15.1%.
  • Our target price is reduced to RM7.80 (14x CY22 P/E. -1 standard deviation of its 5-year mean).

To issue 1.5bn new shares from primary dual listing on HKEX

  • Top Glove (SGX:BVA) on Friday announced plans for a dual primary listing in which it will issue 1.5bn new shares (includes an over-allotment option to issue another 200m shares) via a global offering on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX).
  • The new shares would make up 16.2% of Top Glove's existing share base of 8.2bn (18.7% if over-allotment is exercised in full). The listing is slated to take place in May 21.

Could raise net proceeds up to RM7.7bn

  • Assuming an issue price of RM5.20/share (to be determined later), Top Glove would be able to raise net proceeds of RM7.7bn (including over-allotment shares and net of listing expenses).
  • We understand the proceeds will be mainly used to fund its existing capex plans (80%), potential merger and acquisitions plans (10%), environmental, social and governance initiatives (5%), as well as working capital purposes (5%).

Rationale for this proposed exercise

  • According to Top Glove, the rationale for this dual-listing is:
    • better reach to a wider investor base (especially in Hong Kong, North Asia),
    • raise funds for capex plans (RM10bn in next five years),
    • new platform for potential future fund raising, and
    • better brand awareness.
  • Once completed, Top Glove’s shares would then be listed and traded on Bursa, SGX-ST, and HKEX (with shares transferable among the three stock exchanges).

We are negative on this news at this juncture

  • Despite rationales of this exercise, we are negative on this exercise as it is dilutive to earnings per share. Assuming that the over-allotment option is exercised, this exercise will reduce our FY21- 23F earnings per share by 11.2-15.1%. See calculation in report attached below.
  • In our view, this fund-raising exercise is avoidable as earnings per share’s expected stellar FY21-22F results should be able to support its capex plans, while it has zero gearing currently.
  • Bear in mind that Top Glove recently announced a 20% special dividend for the remaining three quarters in FY21 on top of an existing dividend policy of 50%.
  • Also, Top Glove spent RM1.4bn to conduct share buybacks of 200m shares in the past one year. See report attached below for details.

Maintain ADD with a lower Target price of RM7.80

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2021-02-28
SGX Stock Analyst Report ADD MAINTAIN ADD 2.56 DOWN 2.930