• We remain positive on Top Glove as it adopts a holistic approach in capacity expansion to meet strong demand and boost future earnings.

• Organic growth coming from factory 31 and 32 is expected to go online by May and Dec 2018, meeting the fast expanding nitrile glove demand.

• Proposed acquisition of Aspion provides immediate benefits and potential in the global surgical glove market, fitting into its long term strategy of acquiring growth at reasonable valuation.

• We make adjustment to our earnings forecast due to increase in sales as well as factoring in the Aspion acquisition. Buy recommendation with TP RM10.40 based on PER 26x on FY19 EPS.

Top Glove adopting a holistic approach in capacity expansion.

Strong global demand with expected growth of about 8% to 10% p.a. and shortage of supply caused by closure of vinyl glove factories in China, have created higher demand for Malaysian gloves. Top Glove in meeting the increase in world demand have adopted a holistic approach in its capacity expansion through 1) organic growth, 2) product mix alignment and 3) acquisition (inorganic growth).

New capacity to boost future earnings.

Top Glove’s factory 31 and 32 are expected to commence operation by May and December 2018 respectively. Upon full commissioning in mid- 2019, Top Glove will have a total of 628 production lines and a production capacity totalling 59.7bn gloves p.a. to optimize from the higher global demand over the next 3 years.

Product mix alignment

Top Glove strategy is to have a balanced product mix that is aligned closely to the demand and requirements of the various markets. This would ensure that the company maximises the investment in capacity expansion to meet demand.

Aspion – the next growth catalyst

The proposed acquisition of Aspion would enable Top Glove to expand its market share and become the world’s largest surgical glove manufacturer with a world-leading market share of 29%. We view the acquisition positively and expect value accretion. Top Glove and Aspion have several benefits and synergies that could be harnessed, which include gaining immediate access to patents, new innovative production processes and wider markets. This acquisition is expected to improve Top Glove’s earnings by 8%-16% in FY18-20.

BUY with new TP of RM10.40

Overall we forecast earnings to grow by 32% in FY18 due to higher demand as well as factoring in the Aspion acquisition into our earnings. Our target price at RM10.40 based on PER of 26x (+2SD above 3-years historical mean) applying FY19 EPS.

Source: BIMB Securities Research - 26 Jan 2018