Top Glove announced that they have signed an MOU with Adventa Capital to acquire Aspion, a rubber glove manufacture with a significant exposure in the surgical glove segment. Although the final acquisition has yet to be announced, based on the indicative pricing and funding structure, we believe the acquisition will be earnings accretive for existing shareholders. As the acquisition will cost at least RM1.2bn-RM1.4bn (16-18x PER), it will require the approval from existing shareholders. We are keeping our forecast and BUY call unchanged, pending completion of the deal.

EPS Accretive of 10%-15% for Existing Shareholders

Although 10% of the deal will require new shares to be issued, based on preliminary numbers the deal is still expected to be EPS accretive by 10%- 15% to existing shareholders for FY18E-19E, as the vendor will be providing a minimum profit guarantee of RM80m over the next 2 years. As Top Glove will be retaining the current management team of “Aspion”, the share issuance will help to incentivise the team. The deal will be 90% debt funded (in US$) and the remaining by issuance of new shares.

Multiple Synergies Identified

Apart from the immediate earnings contribution, we believe that there are multiple synergies that Top Glove can benefit from which will further improve its profitability. Top Glove will gain access to not only its clientele (to cross sell), and the consolidation of manufacturing plants will also help to drive margin expansion for both companies. Aspion’s surgical gloves command higher margins than Top Glove, due to several of its proprietary technology. Top Glove will likely focus on its strength in delivering competitive priced medical examination glove.

No Change in Our BUY Call or EPS for Now

We view this deal as a positive catalyst for Top Glove, as it is expected to have an immediate earnings accretion to the existing shareholders. The consolidation of manufacturing plants will also help to deliver synergies within the group, which can help to boost overall margins. We are maintaining our BUY call with an unchanged TP at RM6.64.

Source: Affin Hwang Research - 27 Nov 2017