• Top Glove taking legal actions against Adventa Capital and two directors for RM714.9m arising from (alleged) fraudulent misrepresentations in Aspion’s purchase deal.

• External auditor’s findings revealed that there were overstatement of assets totaling RM74.4m and overvaluation on the acquisition price of Aspion amounting to RM640.5m.

• We revised down Top Glove FY18 and FY19 to 4% and 10% respectively by stripping out the profit guarantee. We have derived new TP of RM10.00 (from RM11.40). Maintain HOLD.

Legal proceedings initiated

Top Glove has initiated legal actions against Low Chin Guan, Wong Chin Toh, ACPL SB and Adventa Capital Pte Ltd for a sum of RM714.9m arising from (alleged) fraudulent misrepresentations in its purchase of Aspion. The company has obtained ex-party Mareva injunctions against the defendants on 2nd July 2018 with the inter-parties hearing set for 13th July 2018. Top Glove intends to pursue its claim against Adventa Capital through the International Arbitration court in Singapore.

Basis of legal actions

The due diligence was carried out via a virtual data room (VDR) during the acquisitions process and later Top Glove discovered that the information revealed by the vendors pertaining to inventories (non existent, obsolete stocks and over -valuation) and PPE (non-operational, decommissioned or non-existent) is not accurate. Investigations by an audit firm appointed by Top Glove revealed that there was an overstatement of assets amounting to RM74.4m in Aspion inventory, plant and machinery. Additionally, it also mentioned that the acquisition price of Aspion was overstated by RM640.5m.

Impact of legal suits

The legal suits initiated are expected to be protracted with Adventa Capital denying the claims made and look set to defend itself. As such, the possibility of Top Glove obtaining the profit guarantee of RM100m stated in the Aspion’s SPA is slim especially with new management team at Aspion’s helm. Excluding the profit guarantee we project Aspion earnings contribution to be about RM42m and RM50m for FY18 and FY19 respectively on the back of Aspion financial revelations by Top Glove. Our FY18 and FY19 earnings forecasts for Top Glove would be reduced by 4% and 10% respectively.

Maintain HOLD with TP RM10.00.

Top Glove outlook remain stable due to its strong fundamentals, robust worldwide demand and improving supply capabilities through new additional factories. Nevertheless, on account of earnings adjustment we have derive new TP of RM10.00 (previously RM11.40) based on 26x PER (+2SD over its 3-years 12-month forward mean) over its FY19 EPS.

Source: BIMB Securities Research - 10 Jul 2018