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This article first appeared in The Edge Financial Daily, on March 16, 2016.

 

Top Glove Corp Bhd
(March 15, RM5.32)
Upgrade to buy with an unchanged target price (TP) of RM6.76:
Top Glove Corp Bhd has announced its proposed listing on the mainboard of the Singapore Exchange (SGX). This listing will entail the secondary listing of and quotation for all the existing ordinary shares of 50 sen each in Top Glove, which are listed and quoted on the Main Market of Bursa Malaysia.

Top-Glove_chart_FD_160316

The proposed listing will not involve any new issuance of Top Glove shares.

However, in order to provide liquidity and trading activity on the mainboard of SGX, the company intends to explore, with its substantial shareholders, the possibility of selling a portion of their shareholdings in Top Glove amounting to approximately S$20 million (RM60.16 million).

We view the proposed SGX listing positively as we think it will provide foreign investors further access to the company. Currently, the foreign shareholding of Top Glove stands at above 30% and with this listing, we are expecting there will be an increased investor reach and diversification of its investor base, including allowing direct participation by investors in Singapore in the equities of Top Glove.

Additionally, we think that the company is also indirectly trying to create liquidity access to its foreign investors that manage larger funds in Singapore and allowing flexibility for these investors to trade either in Singapore or Malaysia. This in return will assist in reducing additional costs of investments needed to invest in countries other than Singapore.

On another note, this proposed secondary listing will also allow Top Glove to exercise flexibility in terms of raising funds for both growth and operations in the future. Furthermore, as the company is actively looking into mergers and acquisitions (M&A) of smaller players and glove-related players, we think the listing will assist in broadening the company’s M&A horizon and boost attractiveness to both potential targets and also future investors.

We make no changes to our financial year 2016 (FY16) to FY17F earnings forecasts for now, pending its second-quarter FY16 results announcement and conference call due today (Mar 16). Though we made no changes to our earnings forecasts at this juncture, we are upgrading our call on Top Glove to “buy” from “neutral” with an unchanged TP of RM6.76. Our valuation is based on FY17 earnings per share (EPS) of 71.1 sen pegged to an unchanged price-earnings ratio (PER) for FY17 of 19 times, which is the company’s five-year historical average PER.

Our upgrade to “buy” is premised on the fact that the stock has shed 23% of its share price from its historical high of RM6.95 back in January 2016, and now has an upside of 30.3% from our TP. We think the selldown in the stock has been overdone due to the strengthening of the ringgit of late despite its fundamentals being intact. Hence, we would recommend investors to relook the stock as its current valuation has turned more attractive at 14.9 times FY17 PER. — MIDF Research, March 15

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