Highlights

• Top Glove Bhd (TG) announced that it has entered into a MOU with Adventa Capital Pte. Ltd to acquire the entire equity interest of its wholly owned subsidiary Aspion Sdn Bhd. Aspion is involved in the manufacturing and distribution of surgical, medical and examination gloves.

Financial Impact

• The acquisition will be funded by cash and share issuance of up to 10% of the acquisition price. The valuation band for the acquisition is between 16x-18x P/E. Aspion has provided a profit guarantee of RM80m for FY18 (FYE Oct). Based on the given parameters, the acquisition price should range between RM1.28-1.44bn.

• Assuming the acquisition is transacted at 18x and 10% of the purchase price is satisfied via share issuance, TG would issue c.21.33m new shares (assuming an issue price of RM6.75) and borrow c.RM1.296bn. Our pro forma implied net gearing will increase to c.0.71x from 0.07x post acquisition. The estimated earnings enhancement to our FY18-19 forecast are to the quantum of 9-19% (see figure#1).

Comment

• We opine that the valuations are fair and are reflective of the sector’s historical mean PE of c.18x (see figure #2). We are positive on the proposed acquisition as the acquisition is expected to be earnings accretive.

• Post-acquisition, TG will acquire an immediate additional capacity of 1.4bn pieces and a total of 3bn pieces in surgical glove capacity by 2019. This almost instantaneous addition of a high margin product to its stables will boost its GP margins in the near term. Currently TG’s surgical gloves capacity is around 0.8-1bn pieces.

• Furthermore, the line extension acquired will allow TG to offer its existing channels more than the general surgery gloves that it manufactures currently. Moreover, TG’s existing sale of surgical gloves is mostly to emerging markets which are price sensitive markets, whilst Aspion has a key presence in developed markets.

• As the groups market share of surgical gloves is expected to increase domestically (from 20% to 50%) and globally (from 14% to 30%).We can expect that as potentially the largest player in the surgical gloves field globally, the efficiency gains and scale achieved post acquisition will ensure TG to remain at the forefront of cost and price competitiveness.

Risks

• Failure to agree on valuations and secure the acquisition within the exclusivity period.

Forecasts

• Maintained pending conclusion of the deal.

Rating

• We maintain our HOLD call as we believe that the market has priced in the acquisition on the back of the premature announcement made during the 4Q17 briefing.

Valuation

• We believe that TG deserves a higher PE multiple than our previously ascribed multiple of 18.3x or 0.5SD above historical mean. The acquisition will propel TG to the biggest surgical glove manufacturer globally with access to IP on industry leading technology within the synthetic materials segment. As such we raise our PE multiple to 20.2x or 1SD above historical mean (see figure #3). Hence our TP increases to RM6.33 (from RM5.74).

Source: Hong Leong Investment Bank Research - 27 Nov 2017