INVESTMENT HIGHLIGHTS

• Proposed 1-for-1 bonus issue

• Proposed bonds issuance of up to USD300m

• 7% EPS dilution expected from conversion of bonds

• FY18-19F earnings lifted by +1.0% and +4.3%

• Maintain NEUTRAL with a revised TP of RM9.46 per share

Proposed 1-for-1 bonus issue. Top Glove announced last Friday that it has proposed to undertake a 1-for-1 bonus issue. The bonus issue which is expected to be completed by the 2H18, will increase Top Glove’s current share base to 2,560.6m from 1,280.3m currently. The bonus issue which is more akin to a share split; is intended to improve the liquidity of Top Glove’s share and increase the attractiveness of the share to potential investors intending to participate in the growth of the company. It also allows existing shareholders to increase the number of share ownership while retaining the percentage of equity held.

Proposed bonds issuance of up to USD300m. In addition to the abovementioned 1-for-1 bonus issue, Top Glove has also announced a proposed bonds issuance of up to USD300m or RM1,159.3m – based on a RM3.8643 per USD rate. The bonds which are to be issued for the purpose of repaying Top Glove’s current borrowings will be a 5-years exchangeable bonds which can be redeemed for Top Glove’s share in the future. It also comes with a 1% coupon rate as opposed to Top Glove’s current financing cost which ranges from 2.5-3.2%. The bond issuance will lead to an interest savings of about RM22.6m annually for Top Glove. That said, should the bonds be fully-converted to Top Glove shares, the number of Top Glove shares will increase by 187.6m to 2,748.0m post-full redemption of bonds and bonus issue. The proposed bonus issuance is also expected to be completed by 2HCY18.

Potential 7% in EPS dilution. We note that the earnings per share (EPS) will be reduced by half post-bonus issue due to the increase in shares outstanding. Additionally, despite the annual interest savings from the issuance of bonds, we are neutral on these two exercises as there will be an additional dilution in earnings if we assume full conversion of the exchangeable bonds to 187.6m of Top Glove shares. Hence, according to our estimate the EPS will reduce by a further 7% due to this.

Earnings forecast. We are revising our FY18-19F earnings by +1.0% and +4.3% respectively as we reduce our financing cost assumption to incorporate the interest savings from the repayment of bank borrowings. Key risks to our earnings would be: (i) higher than expected increase in production costs i.e: raw material prices, labour costs etc; (ii) delays in plant expansions and; (iii) failed acquisition of Aspion.

Maintain NEUTRAL with a revised Target Price (TP) of RM9.46. Post earnings revision and incorporating fullydiluted shares into our earnings assumption, we are revising our TP to RM9.46 (from RM9.19 previously). Meanwhile, our fully-diluted TP will be revised to RM4.73 post-bonus issue in 2HCY18. Our valuation is premised on FY19 EPS of 37.84sen pegged to a higher PER of 25x which is +1.0SD of the company’s 3-year historical average PER to better reflect the earnings accretion coming from the acquisition of Aspion and the current earnings upcycle. However, we maintain our NEUTRAL recommendation as we believe all the positives have been priced in at this juncture. Additionally, we opine that despite the current improvement in raw materials price, the cost savings might be offset by: (i) lower ASPs - as a result of the low raw materials price and; (ii) the strengthening of Ringgit, which could limit its earnings potential going forward.

Source: MIDF Research - 23 Apr 2018