Top Glove has proposed to buy the entire 100% stake in Aspion Sdn Bhd for an indicative valuation of between RM1.28b to RM1.44b at PER of 16x-18x, which is lower than Top Glove’s FY18 PER of 21x, implying earnings and value accretion potential. This acquisition by Top Glove personifies a company evolving from good to great via consistently enhancing earnings and shares value. Reiterate OUTPERFORM. TP raise to RM7.60 from RM7.10 based on 21.5x FY18E revised EPS.

Buying Aspion for between RM1.28b and RM1.44b. In an announcement to Bursa Malaysia, Top Glove via a term sheet has proposed to acquire Aspion Group, a manufacturer and distributor of surgical, medical and medical examination gloves in Malaysia for an indicative 16x to 18x PER with a profit guarantee of RM80m (for Aspion, FYE Oct 2018). The implied valuation for this proposed acquisition works out to between RM1.28b and RM1.44b based on a profit guarantee of RM80m. The purchase consideration is expected to be financed via a combination of cash and issuance of new Top Glove shares of <10% of the total consideration value. We view this latest corporate development by Top Glove as positive and fair considering it is value and earnings accretive. Exclusivity period for this deal is until mid-Jan 18 for due diligence and firming of actual purchase price and expected to be completed by Feb 2018.

Acquisition PER of 16x/18x is at 25%/33% discount to sector average. Based on the sector 1-year forward PER of 24x, this latest acquisition by Top Glove seems fair, valued at between 25% to 33% discount to sector average.

Impact to financials. For illustrative purposes, based on our calculations (please refer to table in the following page on various scenarios), our FY18E/FY19E EPS will be enhanced by 6%/7% (assuming the indicative profit guarantee of RM80m, 90% borrowings at 3%). Top Glove is expected to turn from net cash of RM70m to a net debt and net gearing of RM1.3b (including Aspion’s debt) and 0.5x as at 31 Aug 2017.

Lion’s share of the surgical market in Malaysia. Upon the acquisition, Top Glove's market share in the surgical gloves segment in Malaysia export will rise from an estimated 20% to 50%. With the acquisition, Top Glove will be well-placed to expand its surgical glove product offerings to cater to a broader range of medical practice areas, including high risk surgery, micro-surgery, orthopaedics and obstetrics & gynaecology, thereby moving up the value chain. Mr Low Chin Guan, Aspion’s Managing Director will continue to helm its operations.

Positive outlook. Looking ahead, the group’s expansion plans include the construction of two new manufacturing facilities, i.e. Factory 31 (operational by Mar 2018) and Factory 32 (operational by Dec 2018), which upon completion will boost capacity by 7.8b gloves per annum. By end Dec 2018, Top Glove is projected to have a production capacity of 59.7b (+15%) gloves per annum.

Upgrade FY18E/FY19E net profit by 10%/15%. We raised our FY18E/ FY19E net profit by 10%/15% after factoring this acquisition into our earnings model.

Maintain OUTPERFORM. We raised our TP from RM7.10 to RM7.60 based on an unchanged 21.5x FY18E revised EPS (based on +1.5 SD above 5-year historical mean to better reflect Top Glove’s pursuit to grow via acquisition). The PER valuation of Top Glove (19.2x FY18E PER) is trading at unjustifiably steep discount to Hartalega (33x CY18E PER). The valuation gap should narrow considering that Top Glove has a similar level of net profit and growth rate compared to Hartalega.

A key risk to our call is the deal falling through.

Source: Kenanga Research - 27 Nov 2017