• According to The Edge Financial Daily yesterday, Top Glove may be buying Karex Bhd. Karex is a condom and lubricant manufacturer with operations across the US, UK, Malaysia and Thailand, exporting to over 130 countries around the world valued at a market cap of RM516.2mil.

• Top Glove has a condom plant with a production capacity of 200mil pieces per annum currently.

• Assuming Top Glove completely funds the acquisition at Karex’s current share price of RM0.52/share with borrowings, its interest expense will increase by roughly RM15.5mil. This assumes a takeover PE of 32.5x.

• According to consensus estimates on Bloomberg, Karex is estimated to bring in circa RM14.4mil earnings in FY20F.

• Quick calculations suggest that the acquisition will be slightly earnings dilutive as the higher interest expense will offset the incremental earnings contribution from Karex. Also, net gearing of Top Glove would increase to 54.2% from 49.2% in 2QFY19.

• If the acquisition takes place, there will be downward pressure on Top Glove’s margins. Karex’s EBITDA margin is estimated to be 7.7% vs. Top Glove’s estimated EBITDA margin of 17.3% in FY20F. Karex’s revenue of RM408.0mil in FY18 is circa 10% of Top Glove’s FY18 revenue of RM4,214.5mil.

• Top Glove has not announced any developments on the report. Therefore, we are maintaining our BUY call on Top Glove with an unchanged DCF-based fair value of RM5.66/share (WACC: 6.4% and a terminal growth rate of 2.5%). At our fair value, Top Glove’s implied FY20F PE is 27.7x.

Source: AmInvest Research - 12 Apr 2019