Wong Ee Lin/theedgemarkets.com
November 28, 2017 15:11 pm +08
KUALA LUMPUR (Nov 28): Following Top Glove Corp Bhd's proposed acquisition of a 100% stake in Aspion Sdn Bhd from Adventa Capital Pte Ltd for up to RM1.4 billion last Friday, CIMB Research's back-of-the-envelope calculations indicate that its financial year ending Aug 31, 2018 (FY18) to FY20 earnings per share (EPS) will increase by 3.9% to 13.6%.
CIMB Research noted that the figures were arrived at after accounting for higher interest costs and a larger share base (10% purchase consideration to be satisfied by cash).
"We also note that Top Glove will turn from a net cash company to one with a net gearing ratio of 0.5 times to 0.6 times, which remains healthy, in our view, given the size of the acquisition," said CIMB Research in a note.
Aspion is estimated to be the second-largest surgical glove maker globally in terms of volume, said CIMB Research.
Currently, it has three production facilities (Kulim, Kota Bharu and Kluang) with a capacity of 5 billion per annum, and the company is in the midst of expanding capacity by 24.4%, mainly in the surgical glove segment, which should be completed by end-2019, said the research house.
"As Aspion specialises in surgical gloves, Top Glove will have access to a wider range of surgical glove products while gaining technological know-how that will allow it to produce higher margins and better quality surgical gloves," said CIMB Research.
This acquisition will also include 50 patents and trademarks, including latest R&D products, and will enable Top Glove to tap into Aspion's key developed markets, such as Japan, Europe and North America; the bulk of Top Glove's surgical glove sales are to emerging markets, said CIMB Research.
If reflected, the potential upside to CIMB Research's target price is 11.2% to 12.2%, bringing its would-be target price to RM7.67 to RM7.74, the research house said.
Hence, CIMB Research maintains its add call on the stock but keeps the target price unchanged at RM6.90, still based on 19 times CY19 P/E.
Meanwhile, Maybank IB Research in a note said Top Glove will be taking up a US dollar loan with interest cost of 2.5% to 3%.
"Based on a debt [to] equity ratio of 90:10, we estimate that this proposed acquisition will raise Top Glove's EPS by 9% to 10%," said Maybank IB, adding that the acquisition is estimated to lift Top Glove's surgical glove segment's gross margin by 5 percentage point (ppt) to 10ppt and group's overall margin by 0.4ppt to 0.8ppt.
Upon acquisition, Top Glove will be the world's largest surgical glove supplier with a market share of circa 29% (circa 12% now), said Maybank IB.
Maybank IB is maintaining its EPS forecasts, hold call and target price of RM6.20 for now (20 times 2018 P/E ratio, +1SD to mean). Top Glove presently trades at 22 times 2018 P/E ratio.
At 2.20pm, shares in Top Glove were up three sen or 0.44% to RM6.88 with 1.52 million shares exchanging hands for a market capitalisation of RM8.63 billion. Over the past 12 months, the stock rose 38.77% from RM4.96.
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