Highlights

• To recap, 1Q18 PATAMI came in at RM105.4m (+44.1% yoy, +7.1% qoq), driven namely by higher volumes (+17% yoy, +8% qoq) on the back of stronger demand across all markets.

Aspion Acquisition Gearing Earnings Accretion

• Following their earlier announcement in November, the group announced the signing of the SPA for acquisition of the entire equity interest of Aspion Sdn Bhd. Pending an EGM in March; the acquisition is expected to be completed by April.

• The acquisition is priced at RM1.37bn or 16.9x FY10/18 of Aspion’s projected earnings with additional incentives of up to RM237.2m to be paid by 2020 subject to actual net profits achieved from the Finessis range, potentially bringing the total acquisition to RM1.61bn.

• The vendor has provided a guarantee of up to RM100m cash should there be any shortfall in the profit guarantee (RM81m in FY10/18 and RM110m in FY10/19).

• 10% of the acquisition will be funded via the issuance of 20.5m new shares at an issue price of RM6.6813 with 50% of the shares subjected to a 3 month moratorium.

• 90% of the acquisition will be funded via borrowings of c.RM1.233bn in USD (USD310m) via syndication with half the borrowings (USD155m) funded via a Murabahah term financing, maintaining the groups Shariah status.

• Overall net gearing is expected to increase to c.0.6-0.7x from 0.08x as at 1Q18. We expect interest expense to increase by c.RM35m per annum moving forward.

• The acquisition will complement TG’s existing surgical gloves business. In effect this “marriage” will result in a monolithic surgical glove player with c. 30% of global market share.

• We expect the Finessis product range to drive Aspion’s future earnings growth, as we understand that Finessis commands a significant margin premium over the current product range on offer from Aspion. We understand that surgical gloves margins for TG are c.25% whilst for the bulk of Aspion’s product range is c.32%, Finessis’s margins are north of the latter’s margins.

• We are positive on this acquisition as it is earnings accretive to the group. We anticipate earnings enhancement of c. 6% in FY18, c.13 % in FY19 and c. 24% to our FY20 forecasts on an enlarged share base.

Risks

• Reduction in ASP amid steep competition; continued surge in nitrile and latex prices; and Weaker USD against MYR.

Forecasts

• We adjust our FY18-20 forecasts upwards by 6-24% on the back of Aspion’s contribution to the earnings of the group.

Rating

• BUY ↔ , TP: RM9.95

• Maintain our BUY call on the back of the earnings accretive acquisition. 1 in 3 surgical gloves globally will come from TG as this acquisition marks the group’s intent to dominate a high margin niche segment.

Valuation

• Post earnings adjustment our TP increases to RM9.95 from RM8.47. Our TP is based on a PE multiple of 25x or 2SD above historical mean pegged to CY19 earnings. (See Figure#5).

Source: Hong Leong Investment Bank Research - 15 Jan 2018