• The Edge Financial Daily reported yesterday that Top Glove might be acquiring the privately held surgical glove operations of Adventa Bhd.
• It is believed that Adventa’s surgival glove operations under the Terang Nusa group, which produces and distributes surgical and medical gloves, could be a potential acquisition target for Top Glove which intends to acquire a surgical glove company.

• We have assumed that Top Glove would acquire Adventa in our analysis instead of Terang Nusa.

• Whether or not the acquisition of Adventa would enhance Top Glove's earnings would depend on the pricing. A 20% premium to Adventa's closing price of RM0.835 would imply an acquisition price of RM1.00/share.

• This would mean that Top Glove is acquiring Adventa at an FY18F PE of 15.6x (based on consensus EPS of 6.4 sen) vs. Top Glove's current FY18F PE of 22x. Adventa’s market capitalisation is RM127.6mil based on a share price of RM0.835 and share base of 152.8mil.

• Assuming Top Glove is acquiring 100% of Adventa, we estimate that Adventa would improve Top Glove's FY18F EPS by less than 2% as earnings contribution from Adventa would be partly offset by the higher interest expense. Adventa recorded a net profit of RM670,000 in FY16.

• Top Glove is not expected to face any issue financing the acquisition. The group's net gearing ratio was low at 6.8% as at end-August 2017. Gross cash was RM240.1mil.

• The proposed acquisition is expected to widen Top Glove's product range and allow it to capitalise on the growing demand in surgical glove.

• Meanwhile, in separate filings to Bursa Malaysia, Top Glove and two other rubber glove companies have clarified the news article by The Edge Financial Daily. Top Glove said it was not acquiring or buying Adventa or Supermax. According to Adventa, it had sold off all its surgical glove businesses and undertakings to Aspion Sdn Bhd in 2012. Supermax said the statement “that Supermax may dispose of its assets at a premium to Top Glove is not true and misleading”.

• Nevertheless, Top Glove said it is currently in negotiations to acquire a glove manufacturer, the terms and conditions of which have not been finalised at this juncture. Maintain HOLD with an unchanged fair value of RM6.36/share.

Source: AmInvest Research - 25 Oct 2017