• Top Glove has proposed a 1-for-20 bonus issue of warrants to existing shareholders

• The proposed bonus warrants offers reward to shareholders, while also providing additional funding for future expansion

• Maintain our HOLD rating with higher target price of RM1.44 (from RM1.03)

Proposed a 1-for-20 bonus issue

Top Glove has proposed to undertake a bonus issue of warrants on the basis of 1 bonus warrant for every 20 existing shares. Upon exercised, up to 405.8m of new shares will be issued, increasing Top Glove’s total share base to 8.5bn shares under a maximum scenario. This bonus issue of warrants represents c.5% of the company’s total enlarged shares, and the exercise price is fixed at RM1.27. The proposed bonus issue exercise is expected to be completed in 1Q25, subject to shareholder approval at an annual general meeting (AGM 26th).

Raising funds along with rewards to the shareholders

We view the proposed bonus warrants positively as it rewards existing shareholders while also providing funding for Top Glove’s working capital needs as the warrants are exercised, without resorting to any additional bank borrowings. The proceeds will be utilised for the funding of new factories, refurbishment of the existing factories, and for working capital use, totalling up to RM515m, assuming all warrants being exercised. Our FY25-27E EPS dilution from the full exercise of warrants are 4%, based on our calculation.

Maintain HOLD with higher target price of RM1.44

We maintain our HOLD rating with higher target price of RM1.44 (RM1.03 previously) based on 2.0x FY25E P/B (at +1SD of its 3-year P/B), from 1.4x previously (below its 3-year mean), as we believe that the rubber glove sector is poised to benefit from the US tariff hike towards Chinese players, benefiting the local glovemakers. Top Gloves revised P/B valuation of 2.0x is still lower compared to peers (Harta: 3.2x P/B, Kossan: 2.1x P/B) as believe that Top Glove is relatively less efficient as compared to peers, weighed by lower utilisation rate at 60-65% given the larger asset base, taking a longer time to achieve optimal production level post- COVID19. Despite that, we expect Top Glove to return to profitability in the upcoming quarters amidst the ongoing improved sales volume and ASP. Upside/downside risks: stronger/weaker sales momentum and ASP, rise in raw material costs, and China glovemakers ramping up capacity.

Source: Philip Capital Research - 13 Dec 2024