In an announcement to Bursa Malaysia, wholly-owned Top Care Sdn Bhd will receive a total of RM245m as final settlement agreement with the former vendors of Aspion. This figure is short of the RM640m claims initially filed. However, this latest news is positive as this puts an end to the long-standing dispute. The cash proceeds from the settlement will be netted off against the cost of investment and the related goodwill will be reduced accordingly. It will not have any impact to the income statement. TP is RM5.30 based on 32x CY20 EPS. Reiterate MP.

Top Glove, Adventa Capital reach amicable out-of-court settlement. In an announcement to Bursa Malaysia, wholly-owned Top Care Sdn Bhd will receive a total of RM245m as final settlement agreement with the former vendors of Aspion. TOPGLOV has resolved disputes involving its two subsidiaries namely Top Care Sdn Bhd and Aspion Sdn Bhd. The disputes, were related to the purchase of Aspion by Top Care, have been resolved “amicably” with Adventa Capital Pte Ltd, ACPL Sdn Bhd, Low Chin Guan and Wong Chin Toh. This is figure is short of the RM640m claims. However, this latest news is positive as this puts an end to the long-standing dispute. The cash proceeds from the settlement will be netted off against the cost of investment and the related goodwill will be reduced accordingly. The proceeds will improve the cash position of the Company and will not have any impact to the income statement. Recall in July 2018, wholly-owned Top Care Sdn Bhd has taken legal proceedings against Adventa Capital Pte Ltd as well as Low Chin Guan (previous owner of Aspion), Wong Chin Toh and ACPL Sdn Bhd (“ACPL”) vide a writ. In the writ, Top Glove and Top Care claimed for RM640m arising from an alleged conspiracy to defraud Top Care and Top Glove, and fraudulent misrepresentations made by Low Chin Guan and Wong Chin Toh in relation to the acquisition of Aspion Sdn Bhd. Top Glove and Top Care have seeked a Mareva injunction to restrain Adventa Capital from disposing of its assets in Malaysia up to the value of RM714.9m pending disposal of the arbitration at the Singapore International Arbitration Centre. Subsequently Adventa Capital made a counterclaim against TOPGLOV for: (i) losses suffered by Adventa Capital as a result of the Company’s and Top Care’s breach of the SPA and (ii) losses suffered by Adventa Capital as a result of Low’s removal from the management of Aspion. TOPGLOV had in April 2018, completed the acquisition of Aspion Group, a manufacturer and distributor of surgical, medical and medical examination gloves in Malaysia for RM1.37b.

Stage set for recovery in volume growth. The stage is now set for a solid growth in the sector in FY20 following three quarters of anaemic quarterly earnings growth. From a low base due to the lackluster demand of the past 12 months, the sector will benefit from re-stocking activities ramping up demand as the current outbreak of the Wuhan virus enforces higher hygiene standards. However, specific to Top Glove, we are less sanguine on its short to medium-term prospects as we expect the group’s overall profitability to be impacted by competitive pressures from low margins latex gloves and slow recovery at Aspion although these will be cushioned by uptick in nitrile demand.

Maintain MP. Our TP is RM5.30 based on unchanged 32x CY20E EPS (at +1.5SD above 5-year historical forward mean). Although we expect uptick in nitrile demand to anchor growth in subsequent quarters, the group’s overall profitability is facing competitive pressure from low margins latex gloves and a slow recovery at Aspion.

A key upside risk to our call is the better-than-expected margin.

Source: Kenanga Research - 3 Mar 2020