This article first appeared in The Edge Financial Daily on April 24, 2018
Top Glove Corp Bhd
(April 23, RM10)
Maintain neutral with a higher target price (TP) of RM9.70: Top Glove Corp Bhd has proposed a one-for-one bonus issue to reward its shareholders and a convertible bond sale of up to US$300 million (RM1.17 billion) to repay its existing bank borrowings. Subject to all the required approvals being obtained and market conditions, the proposals are expected to be completed by the second half of 2018. On a side note, the completion of the acquisition of Aspion Sdn Bhd in early April has boosted the group’s annual capacity to 56.2 billion pieces per annum (pa). All in, we raised our earnings estimates by 7.6% to 10.5% for financial year 2018 forecast (FY18F) to FY20F mainly to account for additional earnings contribution from Aspion (as we had earlier conservatively assumed Aspion to only contribute from May 2018 onwards), lower interest costs resulting from the repayment of bank borrowings using proceeds from the bond sale and increase in natural rubber glove demand in emerging markets. Our TP is subsequently raised from RM8.75 to RM9.70 (cum-bonus).
Top Glove has proposed to undertake a bonus issue on the basis of one bonus issue for every one existing share held, involving up to 1.28 billion new shares to reward its shareholders and improve the liquidity and marketability of the shares. The exercise will bring up its total share base to about 2.56 billion shares. Though no direct impact on fundamentals, we view the move positively as it will serve to enhance liquidity of the shares and encourage greater participation by investors.
Meanwhile, Top Glove plans to issue up to US$300 million of convertible bonds, mainly to raise funds to repay its existing bank borrowings which were used to fund its investments including the acquisition of Aspion and its working capital. Currently it has around RM2,087.4 million of bank borrowings. We believe this move is to free up the bank loan facilities to fund its future investments as the group is actively looking for more mergers and acquisitions to support future growth. We are neutral on this exercise. While convertible bonds offer a lower cost of financing and may reduce the group’s debt if the convertible option is exercised, it may result in a dilution to the group’s common share and its earnings per share upon conversion though not immediate.
The issue price of the bonds is fixed at 100% of the principal amount while the tenure of issue is five years from the issue date. The exchange price, coupon rate and conversion ratio will be determined at a later date after receipt of all relevant approvals and prior to issuance of the bonds. Prior to having the final terms, the exact amount of interest savings cannot be determined at this juncture. As an illustrative example, the group guided that it may reap an average interest savings of around RM22.6 million pa based on an illustrative yield of the bonds of 1% pa. The proposed bond issue is expected to raise around RM1,159.3 million, based on the prevailing exchange rate of RM3.8643 to US$1. — PublicInvest Research, April 23