This article first appeared in The Edge Financial Daily on March 6, 2019
Top Glove Corp Bhd
(March 5, RM4.60)
Maintain neutral with a target price of RM5.70: On March 1, 2019 Top Glove successfully issued its guaranteed exchangeable bonds with a face value of US$200 million (about RM814.1 million).
The bond is to repay existing borrowings and reduce interest costs going forward.
The five-year bonds are priced at a fixed coupon rate of 2% per annum.
This move will free up Top Glove’s bank loan facilities and allow it to fund and support future growth, particularly through merger and acquisition.
We view this move positively as it will effectively reduce its finance costs by RM16 million per annum, about 2% of FY19 operating profit, for the next five years.
The proceeds from the bond issuance will be used to pare down the group’s debts, of which RM630.9 million will be used to repay syndicated loans that funded Aspion Sdn Bhd’s acquisition; RM169.4 million to repay borrowings used to fund the group’s working capital; and, RM13.8 million to fund the bond issue’s estimated fees, commission and expenses.
Considering that the bond comes with a convertible feature, the holders have the right to convert the bond to the group’s ordinary shares at an exercise price of RM6.204 apiece, anytime during the exchange period.
The exercise price reflects a 20% premium to its closing price of RM5.17 on Feb 20, 2019.
The issuance of the exchangeable bond is not expected to impact the group’s borrowings and its gearing ratio as it will be used to retire existing debt. With this issue, the group intends to save approximately 50% of the existing interest costs for these borrowings, which will translate into cash flow savings of RM16 million per annum.
Considering that the coupon rate is fixed at 2% per annum, the group will thereby limit its exposure to any future fluctuations in the London Inter-bank Offered Rate.
Although the bonds are embedded with a convertible feature, however, we do not expect any immediate dilution of earnings since the conversion of shares should only take place when the exercise is in the money, as share price trends above RM6.20. — PublicInvest Research, March 5