We raise our TP to RM10.10 (from RM8.50) and reaffirm our BUY call on Top Glove (TOPG), as we incorporate the Aspion acquisition into our numbers, post a recent analyst briefing hosted by management. We believe shareholders are likely to vote in favour of the deal, as the deal will not only be earnings and value accretive to existing shareholders, but can also help drive the group’s longer-term earnings growth as it expands into new business segments.

Earnings-accretive Deal Despite Issuance of New Shares

The initial purchase consideration of Aspion at RM1.37bn is to be financed by debt and a placement of new shares to the seller. We expect the acquisition to be EPS accretive to existing shareholders in FY19E by 10- 15%, backed by the vendor-profit guarantee, despite a 1.63% enlarged share base. The earnings are driven by the doubling of Apsion’s surgical glove capacity to 3bn pcs a year by 2019. There could be more upside from Aspion, as we have not factored in any contribution from its new product, Finessis, a high-end surgical glove.

Aspion Deal Valuation Looks Attractive at 12.6x FY19E PER

Although the final consideration will only be finalised in FY20E, as there are add-on incentives based on the performance of Finessis, we believe this will be an earnings-accretive deal for shareholders. The valuation of Aspion is not rich as it is currently valued at 12.6x FY19E PER, which is at a significant discount to its listed peer average of around 21x FY19E PER. The incentives will likely increase the overall price paid for Aspion in the future, but it is based on 3.4-8.5x earnings for the new product, which is still lower than current valuations. We have yet to factor into our model any synergies arising from the acquisition.

Reaffirm BUY With a Higher TP of RM10.10; a Country Top Pick in 2018

We raise our 12-month TP to RM10.10 (from RM8.50), still based on a FY19E PER of 22x (+1SD of past-8-year mean), after the 3-16% increase in our FY18-20E EPS to incorporate the contribution from Aspion, which is targeted to be completed by April 2018. At the briefing management also guided that demand from China is likely to remain robust as more vinylglove manufacturing plants in China are being shut down, which we believe is positive for the sector as this will continue to support earnings growth in the industry. In our view, the recent hike in ASPs is a positive sign that demand remains strong. Risk: sharp appreciation in the Ringgit.

Source: Affin Hwang Research - 12 Jan 2018