Top Glove Corporation Berhad - No Signs of Settlement Just Yet

Date: 02/08/2019

Source  :  PUBLIC BANK
Stock  :  TOPGLOV       Price Target  :  4.15      |      Price Call  :  SELL
        Last Price  :  4.50      |      Upside/Downside  :  -0.35 (7.78%)

According to a news report published by The Business Times, Aspion’s ex directors are now countersuing Top Glove over the RM1.37bn Aspion deal and wrongful termination after Top Glove removed them as Aspion’s directors. We remain concerned over the risk of Top Glove losing the lawsuit, which could trigger a de-rating of its share price. We maintain our Underperform call with an unchanged TP of RM4.15.

  • Aspion’s directors countersuing. According to the Business Times report dated 31 July 2019, two of Aspion’s ex-directors, Low Chin Guan (Aspion’s founder and ex-MD) and Wong Chin Toh (Aspion’s former director) have filed countersuits against Top Glove over the RM1.37bn Aspion deal and breach of employment contract after being wrongfully terminated. Since the duo no longer manages Aspion, the parties claimed that they were unable to maximize Finessis gloves’ potential, nor have control over the potential gains arising from the Finessis incentive. It was also highlighted in the article that, in the duo’s defense, Top Glove has yet to make any impairment over the purchase of Aspion thus far, and hence, dismissing the alleged conspiracy of attempting to defraud Top Glove.
  • To recap. Top Glove had previously acquired Aspion for a purchase consideration of RM1.37bn. The deal comes with a profit guarantee of maximum RM100m, should Aspion’s earnings fall short of RM80.9m and RM108.3m for FY18 and FY19 respectively. Note that the profit guarantee clause is no longer valid, given that Top Glove has now gained full control over the management of Aspion after discovering irregularities. On top of the purchase consideration, Top Glove has agreed to provide Finessis Incentive, based on the earnings from the sale of Finessis range gloves. After uncovering the irregularities, Top Glove has launched legal actions against Adventa Capital (previous owner of Aspion) over fraudulent misrepresentation, to recover a sum of RM715m from the plaintiff.
  • Outlook. While we acknowledge that the possible reason behind no impairments made thus far was due to Top Glove effort in revamping Aspion to turn Aspion around, we remain concerned over the possibility of Top Glove losing the lawsuit, taking into account the counterclaims made by the duo that rebutted Top Glove’s “fraudulent misrepresentation” allegation. In the worst case scenario of Top Glove losing the legal suit, the stock could be at risk of de-rating. We maintain our Underperform call with a TP of RM4.15.

Source: PublicInvest Research - 2 Aug 2019

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