C O M P A N Y U P D A T E Monday, November 27, 2017 FBMKLCI: 1,717.23 Sector: Healthcare THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Top Glove Corporation Berhad TP: RM6.30 (-6.7%) Acquiring the World s Second Largest Surgical Glove Player Last Traded: RM6.75 SELL Wilson Loo, CFA Tel: +603-2167 9606 wilsonloo@ta.com.my www.taonline.com.my Top Glove had entered into a term sheet for the proposed acquisition of Aspion Sdn Bhd, the world s second largest surgical glove player for RM1.3bn to RM1.4bn which we deduced based on a contemplated PE multiple of 16.0x to 18.0x against Aspion s guaranteed target net profit of at least RM80.0mn for FYE October 2018. Overall, we view the proposed acquisition positively. Notably, the group would morph into a leading surgical glove player. The surgical gloves market is a growing and lucrative one with high barriers to entry. We estimate the acquisition to be earnings accretive with EPS accretion of 9.1%-11.3%. On the flipside, we expect the group to turn from a net cash position to net gearing of 0.5x-0.7x. We make no changes to our estimates. Maintain Sell with a TP of RM6.30/share based on 20.0x PE against CY18 EPS. Acquiring a Glove Manufacturer for RM1.3bn to RM1.4bn Top Glove announced that it had entered into a term sheet with Adventa Capital Pte Ltd (ACPL) for the proposed acquisition of the entire equity interest in Aspion Sdn Bhd (Aspion) a wholly-owned subsidiary of ACPL. Aspion is principally involved in the manufacturing and distribution of examination gloves, surgical gloves and protection gloves. We deduce the purchase consideration to be RM1.3bn to RM1.4bn. This is based on a contemplated PE multiple of 16.0x to 18.0x against Aspion s guaranteed target net profit of at least RM80.0mn for FYE October 2018 as stated under the term sheet. Another salient term to note is that there is also a target net profit of RM110.0mn for FYE October 2019. The group intends to satisfy the purchase consideration via a combination of cash and the issuance of new Top Glove shares. The new Top Glove shares to be issued will not comprise more than 10% in value of the purchase consideration. Figure 1: Aspion Sdn Bhd s Company Structure Share Information Bloomberg Code TOPG MK Stock Code 7113 Listing Main Market Share Cap (mn) 1,254.8 Market Cap (RMmn) 8,470.0 52-wk Hi/Lo (RM) 7.05/4.56 12-mth Avg Daily Vol ('000 shrs) 2,405.3 Estimated Free Float (%) 49.2 Beta (0.3) Major Shareholders (%) Tan Sri Dato Sri Lim Wee Chai - 29.4 EPF - 5.5 Firstway United Corp - 5.1 Forecast Revision (%) FY18 FY19 Forecast Revision (%) - - Net Profit (RM mn) 369.2 437.1 Consensus 390.8 430.0 TA/Consensus (%) 94.5 101.6 Previous Rating Sell (Maintained) Financial Indicators FY18 FY19 Net gearing (x) Net cash Net cash CFPS (sen) 42.9 46.0 P/CFPS (x) 15.7 14.7 ROAA (%) 12.1 13.4 ROAE (%) 17.5 18.9 NTA/Share (RM) 1.8 1.9 Price/ NTA (x) 3.8 3.5 Share Performance Price Change (%) TOPG MK FBMKLCI 1 mth 4.7 (1.7) 3 mth 20.1 (2.9) 6 mth 25.2 (3.1) 12 mth 30.1 5.5 (12-Mth) Share Price relative to the FBMKLCI Source: Bloomberg Page 1 of 8
Aspion: The World s Second Largest Surgical Gloves Manufacturer Aspion s existing capacity of 4.8bn gloves/annum comprises of 70% examination gloves (3.4bn gloves/annum) and 30% surgical gloves (1.5bn gloves/annum). Although the group s total capacity pales in comparison to that of Top Glove s of 51.9bn gloves/annum, it is not the case when just comparing surgical gloves alone. In the global surgical glove market, it was estimated that the largest share was commanded by Ansell at 21% and this was followed by Aspion at 17% and Top Glove at 12% (see Figure 2). All of Aspion s manufacturing facilities are located in Malaysia: Kluang (Johor), Kulim (Kedah) and Kota Bharu (Kelantan) and utilisation rates are healthy at ~70%. Figure 2: Estimate of Global Share of Surgical Glove Market A Multitude of Benefits to Be Realised Greater Exposure to Growth Market with High Barriers to Entry Like examination gloves, the surgical gloves market is a growing market. Its global demand was estimated at 4bn gloves/annum and expected to grow at a CAGR of 8% to 6bn gloves/annum by 2020. Compared to other glove types, their usage is more specialised and hence, they generally fetch higher prices (i.e. surgical gloves: USD70/1,000 gloves vs. examination gloves: USD20/1,000 gloves). Furthermore, barriers to entry into the market are high, demanding stringent quality standards, lengthy product approval and registration processes and technical expertise. That said, Aspion offers the opportunity for Top Glove to increase its exposure to a small but growing and lucrative market with high barriers to entry. Top Glove to Morph into a Leading Surgical Glove Player With a combined share of 29% of the surgical glove market (17% Aspion + 12% Top Glove), Top Glove would leapfrog market leader Ansell (21%) and morph into a leading surgical glove player, not just locally but also in the world alongside its dominance in the manufacturing of examination gloves. And in terms of product mix, Top Glove s mix of surgical gloves by volume is expected to increase by 2pp to 4% and by value is expected to increase by 8pp to 13% (see Appendix). Facilitating future growth, Aspion has expansion plans which mainly involves the doubling of its surgical glove capacity to 3.1bn gloves/annum. Encouraging for this, Top Glove also sees the potential of MNCs outsourcing the manufacturing of their surgical gloves in the future. Page 2 of 8
Bolster Top Glove s Portfolio with Higher Margin Products As it is, Top Glove s domain in surgical gloves is at the lower-end of the value chain, mainly producing surgical gloves for general surgery application. Aspion, on the other hand, possesses a comprehensive portfolio of surgical gloves which extends to a broad range of higher value specialised areas like higher risk surgery, micro-surgery, obstetrics and gynaecology and orthopaedics. The inclusion of these products are expected to improve Top Glove s surgical glove gross profit margins from ~20%-25% to ~30%. Besides, we also note that the prices of Aspion s specialised surgical gloves are ~50%-100% higher than that of Top Glove s. Acquire Access to Innovative Technologies and Know-How Aspion is active in research and development, continuously seeking to innovate. The group has 50 trademarks and patents registered in major countries like the USA, Europe and Japan. Among others, it possesses the technologies and know-how in manufacturing surgical gloves: Using a new breakthrough synthetic material named Flexylon TM which mimics the physical attributes of natural rubber latex without its drawbacks of contracting allergies from latex proteins and chemical accelerators, and Which demonstrates reduced transfer of enveloped viruses (i.e. HIV) in cases of percutaneous injuries. The technology applied is regarded as superior to gloves with antimicrobial coating. Synergies from Cross-Selling in Existing and New Markets Top Glove s surgical gloves are mainly marketed in emerging markets. Whereas, Aspion has ~35% of its surgical gloves marketed to developed countries like the USA, Europe and Japan. That said, there will be synergies from the cross selling of Top Glove s and Aspion s surgical gloves in each other s markets which would be tougher if done organically. Attractive Consideration, Earnings Accretive but Gearing to Stretch Overall, we view the proposed acquisition positively. Firstly, the purchase consideration based on a contemplated PE multiple of 16.0x to 18.0x appears fair. It may appear to be priced at the higher end when benchmarked against small rubber glove manufacturers which currently trade at a PE multiple of 15.7x against CY18 EPS (see Table 1). However, we opine it is warranted considering Aspion s leading and growing position in the global surgical gloves market coupled with its portfolio of niche surgical glove variants as well as innovative capabilities. Secondly, we deduce the acquisition to be earnings accretive to shareholders with EPS accretion of 9.1%-11.3% (see Table 2). This is after taking into account the dilutive impact from any new share issuance and funding from USD borrowings to be undertaken at interest rates of 2.5%-3.0% as guided by management to fund the acquisition and net profit guarantee of RM80.0mn for FYE October 2018. On the flipside, with increased borrowings, we expect the group to turn from a net cash position of RM70.6mn as at 4QFY17 to net gearing of 0.5x to 0.7x. Notwithstanding, considering the group s healthy cash flow generating capacity, we believe that it should have no issue paring down its borrowings over time. Page 3 of 8
Table 1: Peer Comparison Company Mkt Cap PER (x) EPS Growth Div Yield (%) ROE (%) RM mn CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 Large Capacity Rubber Glove Manufacturers Top Glove 8,482 24.4 21.4 (2.0) 14.0 2.2 2.2 17.3 18.0 Supermax 1,403 16.7 12.9 2.7 30.0 1.8 2.3 7.8 9.6 Hartalega 15,436 41.3 34.0 34.3 21.3 1.1 1.3 21.5 23.0 Koss an 5,084 27.4 20.8 11.2 31.7 1.8 2.4 16.5 19.8 Weighted Average 11,118 33.1 27.3 18.9 21.4 1.6 1.8 18.9 20.5 Company Mkt Cap PER (x) EPS Growth Div Yield (%) ROE (%) RM mn CY17 CY18 CY17 CY18 CY17 CY18 CY17 CY18 Small Capacity Rubber Glove Manufacturers Comfort Glove Bhd 587 17.8 17.5 12.4 2.0 na na 15.1 14.0 Careplus Group Bhd 175 21.6 11.1 na 93.8 0.9 0.9 8.2 14.2 Rivers tone Holdings Ltd 2,423 17.9 15.6 8.2 14.8 2.2 2.5 22.9 22.7 Weighted Average 3,184 18.1 15.7 9.0 16.7 2.1 2.4 20.7 20.6 Source: Bloomberg, TA Securities Table 2: Scenario Analysis Purchase Consideration: Impact on: Estimated Issuance of shares* Based on (RM mn') Share base EPS Net Gearing^ TP Upside/Downside 16.0 x PE 1,280 No - +11.3% 0.6x RM7.02 +6.3% 16.0 x PE 1,280 Yes +1.7% +10.4% 0.5x RM6.97 +5.5% 18.0 x PE 1,440 No - +10.0% 0.7x RM6.94 +5.1% 18.0 x PE 1,440 Yes +1.9% +9.1% 0.6x RM6.88 +4.3% Note: * If 'Yes', issuance of shares is equivalent to 10% of purchase consideration. If 'No', no shares are issued. ^ As at 4QFY17, Top Glove had a net cash position of RM70.4mn. Impact We make no changes to our estimates pending completion of the exercise and further details on Aspion s financials. Valuation & Recommendation Our TP for Top Glove is raised to RM6.30/share based on a higher PE of 20.0x (previously 19.0x) against CY18 EPS. The revised PE is closer towards the +1S.D. band of the group s 5-year average PE of 16.6x and reflects expectations for greater growth potential from an enhanced glove portfolio. At this juncture, the estimated upside potential for the stock from the proposed acquisition appears limited (see Table 2). Reiterate Sell. Page 4 of 8
Figure 3: Forward PER x 30.0 25.0 20.0 15.0 10.0-1SD: 12.4x Average: 16.6x +1SD: 20.7x 5.0 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Source: Bloomberg, TA Securities [THE REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK] Page 5 of 8
Earnings Summary P&L Balance Sheet FYE Aug 31 (RMmn) FY16 FY17 FY18F FY19F FY20F FYE Aug 31 (RMmn) FY16 FY17 FY18F FY19F FY20F Revenue 2,888.5 3,409.2 3,598.3 3,956.5 4,246.8 Fixed assets 1,278.4 1,647.0 1,771.6 1,838.9 1,899.8 EBITDA 522.7 485.0 613.8 700.8 746.9 Associates + Subsidiaries 4.0 0.0 (1.1) (2.3) (3.6) Dep. & Amor. (107.2) (111.8) (175.5) (182.6) (189.1) Others 30.0 37.9 37.9 37.9 37.9 EBIT 415.5 373.2 438.3 518.2 557.8 LT assets 1,312.4 1,684.9 1,808.4 1,874.5 1,934.1 Net finance costs 25.4 10.9 9.8 12.3 12.9 Share of results of assoc. 1.3 (1.0) (1.1) (1.2) (1.3) Inventories 263.7 315.8 333.3 366.5 393.4 EI 10.1 0.0 0.0 0.0 0.0 Cash 224.1 240.1 260.5 342.1 461.3 PBT 442.2 383.1 447.1 529.2 569.4 Others 849.0 700.4 746.0 792.6 830.3 Adj PBT 432.1 383.1 447.1 529.2 569.4 Current assets 1,336.7 1,256.2 1,339.8 1,501.2 1,685.0 Taxation (79.8) (50.5) (76.0) (90.0) (96.8) MI (1.7) (1.7) (1.9) (2.2) (2.4) Total assets 2,649.1 2,941.1 3,148.2 3,375.7 3,619.1 Net profit 360.7 330.9 369.2 437.1 470.2 Core net profit 350.6 330.9 369.2 437.1 470.2 Trade payables 332.2 419.5 478.7 520.5 558.1 EPS (sen) 29.1 26.6 29.7 35.2 37.9 ST borrowings 317.8 314.6 271.0 243.9 219.5 DPS (sen) 14.5 14.5 14.6 17.2 9.3 Others 40.9 62.3 62.3 62.3 62.3 Current liabilities 690.9 796.5 812.0 826.6 839.9 Ratios FYE Aug 31 FY16 FY17 FY18F FY19F FY20F LT borrowings 81.6 61.8 67.8 61.0 54.9 Valuations Others 50.8 66.3 66.3 66.3 66.3 PER (x) 23.2 25.3 22.7 19.2 17.8 LT liabilities 132.4 128.0 134.0 127.3 121.2 Dividend yield (%) 2.1 2.1 2.2 2.6 1.4 PBV (x) 4.6 4.2 3.8 3.5 3.2 Share capital 627.4 636.6 636.6 636.6 636.6 Reserves 1,190.6 1,370.8 1,554.5 1,771.9 2,005.8 Profitability ratios Shareholders' funds 1,818.0 2,007.4 2,191.1 2,408.5 2,642.5 ROAE (%) 21.0 17.2 17.5 18.9 18.5 MI 7.8 9.2 11.1 13.3 15.6 ROAA (%) 13.5 11.8 12.1 13.4 13.4 EBITDA margin (%) 18.1 14.2 17.1 17.7 17.6 Total liabilities + equity 2,649.1 2,941.1 3,148.2 3,375.7 3,619.1 PBT margin (%) 15.0 11.2 12.4 13.4 13.4 PAT margin (%) 12.1 9.7 10.3 11.0 11.1 Cash Flow FYE Aug 31 (RMmn) FY16 FY17 FY18F FY19F FY20F Liquidity ratios PBT 442.2 383.1 447.1 529.2 569.4 Current ratio (x) 1.9 1.6 1.7 1.8 2.0 Dep. & Amor. 107.9 111.8 175.5 182.6 189.1 Quick ratio (x) 1.6 1.2 1.2 1.4 1.5 Others (43.5) (2.2) (10.2) (12.4) (12.8) Changes in WC 25.6 (44.7) (4.0) (38.0) (27.0) Leverage ratios Tax paid (98.5) (65.5) (76.0) (90.0) (96.8) Total liabilities/equity (x) 0.5 0.5 0.4 0.4 0.4 Operational cash flow 433.7 382.6 532.4 571.5 621.9 Net debt/equity (x) Net cash Net cash Net cash Net cash Net cash Int. coverage ratio (x) nm nm nm nm nm Capex (231.3) (447.1) (300.0) (250.0) (250.0) Others 196.9 291.3 11.3 13.6 14.1 Growth ratios Investing cash flow (34.4) (155.8) (288.7) (236.4) (235.9) Sales (%) 15.1 18.0 5.5 10.0 7.3 Pretax (%) 21.6 (13.4) 16.7 18.4 7.6 Dividend paid (168.9) (181.7) (185.5) (219.6) (236.3) Earnings (%) 28.9 (8.3) 11.6 18.4 7.6 Net change in debts (198.1) (29.8) (37.6) (33.9) (30.5) Total assets (%) (1.4) 11.0 7.0 7.2 7.2 Others 38.6 0.7 0.0 0.0 0.0 Financial cash flow (328.3) (210.8) (223.2) (253.5) (266.8) Net cash flow 71.0 16.0 20.5 81.6 119.2 Opening cash flow 146.5 224.1 240.1 260.5 342.1 Forex 6.6 0.0 0.0 0.0 0.0 Closing cash flow 224.1 240.1 260.5 342.1 461.3 Page 6 of 8
Appendix 27-Nov-17 Aspion Sdn Bhd s Manufacturing Facilities Project Sales Mix in FY18 by Volume Page 7 of 8
Project Sales Mix in FY18 by Value Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Monday, November 27, 2017, the analyst, Wilson Loo Jia Chern, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 2072 1277 Fax: 603 2032 5048 www.ta.com.my Page 8 of 8