What’s new

• Top Glove announced that the Group intends to acquire entire interest of Aspion Sdn Bhd (Aspion), a wholly owned subsidiary of Adventa Capital Pte Ltd (ACPL).

• Aspion is the world leading surgical manufacturer with an established presence in the operating room market and a comprehensive range of surgical gloves in multiple specialty categories.

• The exclusivity period effect is from 24 Nov 17 (date of term sheet) until 15 Jan 2018 whereby the Group must not solicit or engage in any discussion or negotiation the proposed transactions to any third party (must inform ACPL of such a proposal and provide details of such proposal.

Comment

• Largest surgical gloves exporter in Malaysia. We are positive with the proposed acquisition as we believe that the Group would be able to increase its total annual production capabilities of surgical and examination gloves through manufacturing facilities of Aspion Group from current 2% contribution.

• Better gross profit margin. The production of surgical gloves will command a higher average selling price due to its specialised usage and access to innovative technologies in glove manufacturing processes and materials from Aspion which will improve the cost efficiency. Thus, we expect the proposed acquisition will generate positively to the gross profit margin of the group.

• Paving the way for surgical gloves market. This enables the Group to overcome strong barriers to enter into surgical glove market in a short span of period since Aspion possesses trademarks and patents registered in major countries. This segment of product requires rigorous quality standards, lengthy product approval and registration process, as well as specialized technical and manufacturing experience.

• Immediate penetration in surgical glove sector. The acquisition would enable the Group to have immediate access into North America, Europe and Japan upon conclusion of transaction and also expand its presence into other new regions and countries including North America, Europe, Asia Pacific and Middle East.

• Adoption of advanced technology. Aspion’s R&D efforts would allow the production of surgical gloves using a new breakthrough synthetic material which do not contain natural rubber latex protein or any rubber processing chemicals such as accelerators which may cause allergies. Hence, we believe this product is less prone to fluctuations in raw material prices as it made of synthetic rubber and well received by its clients, especially hospitals, without causing allergies to patients under highly stringent medical conditions.
• Purchase consideration deemed reasonable. We expect the Group to fork out RM1.3b-1.4b for Aspion based on 16-18x 2018F P/E with target PAT of RM80.0m (ACPL will guarantee the target PAT and reimburse any shortfall, if any). The purchase price is fair as target P/E of 16-18x is on par with Comfort Glove Berhad’s (small-sized glove manufacturer with estimated PAT of RM34.2m for FY18F) current valuation of 17.5x forward PE and 15-20% discount to the larger player such as Kossan which is trading at 21.3x forward P/E.
• Increase in EPS and net gearing. Assuming the Group funds its acquisition (with purchase consideration of RM1.4b) with debt to equity ratio of 70:30, we shall see the Group issues 67m shares or equivalent to 5.3% of its outstanding shares to ACPL (based on price of RM6.28, which is 7% discount to its current share price). Overall, the Group’s EPS could increase by 14.3% from 31.6 sen in FY18F to 36 sen. Balance sheet wise, we shall see the Group’s net gearing to increase to 54.7% from 6.8% as of FY17.

Earnings Outlook/Revision

• We retain our earnings forecasts for FY18F and FY19F pending finalisation of the deal.

Valuation & Recommendation

• Maintained BUY with a higher target price of RM7.60 (from RM6.85 previously) after we roll over our valuations to FY19F with higher prospective earnings growth upon completion of the acquisition. Our target price is pegged at 21.7x FY19F PE (+2 SD above mean) based on EPS 35.1 sen.

• Overall, we favour the proposed acquisition as it will: a) deliver better gross margin profit to the Group; b) synergize with its current business with anticipated higher economies of scale upon completion of the exercise; c) further expand its existing product range and the use of technology and innovations of Aspion to penetrate untapped markets.

Source: JF Apex Securities Research - 27 Nov 2017