Top Glove's S'pore unit privatisation move viewed positively

INTERVIEW TOP GLOVE.... TAN SRI LIM

PETALING JAYA: The market views positively Top Glove Corp Bhd’s proposed privatisation of its Singapore-listed unit Medi-Flex Ltd as this will improve the long-term earnings contribution to the company.

According to Affin Investment Bank Bhd analyst Mandy Teh, the corporate exercise could plug Medi-Flex’s “earnings leakage” to minority shareholders and deliver cost savings to Top Glove.

However, CIMB Investment Bank Bhd research head Terence Wong said that while the privatisation of Medi-Flex would be earnings-dilutive in the near term for Top Glove, it could boost the latter’s bottom line in the longer term, as Medi-Flex should continue to grow strongly, given its focus on nitrile gloves.

Last week, Top Glove announced its plan to seek the voluntary delisting of Medi-Flex, its indirect 80%-owned subsidiary, from the Catalist Market of Singapore Exchange.

Top Glove cited earnings enhancement for the company, savings from listing expenses such as that in relation to compliance costs and the low liquidity of Medi-Flex shares as the rationale for its proposed privatisation of its Singapore-listed unit.

According to its filing with the stock exchange, the proposed exercise would involve an offer of 15 Singapore cents (38 sen) for the balance 20% stake that it did not already own in Medi-Flex. The exercise is estimated to cost Top Glove about RM71mil, which it would pay with internal funds.

Affin deemed the offer price to take Medi-Flex private as reasonable based on the implied acquisition price of 12 times the estimated earnings for financial year (FY) ending Aug 31, 2014.

It added that it believed funding the privatisation exercise would not be an issue for Top Glove, given its healthy balance sheet with a robust net cash position of RM123.1mil, or 23 sen per share, as of end-August 2013.

An analyst from a local research house said: “We understand from the management that 80% of Medi-Flex’s total capacity of 3.8 billion pieces is for nitrile gloves, which should augur well for the group moving forward.

“Upon the expected completion of the proposal by the third quarter of 2014, Top Glove will benefit from increased earnings contribution from Medi-Flex, which we estimate could amount to an additional RM4.9mil (based on FY2013 earnings).”

In general, demand for nitrile gloves has been on an uptrend, as many consumers were switching from natural rubber to nitrile gloves. Nitrile gloves generally also command higher margins.

Medi-Flex operates two factories in Banting, Selangor, with 44 production lines and a total production capacity of 3.8 billion pieces of gloves a year.

Medi-Flex saw its net profit surge 133% to RM24.7mil for FY13, from RM10.6mil a year earlier, while revenue rose 19% to RM200.8mil from RM169.3mil.

Top Glove reported a decline in net profit by around 3% to RM195.9mil, or 31.61 sen per share, for FY13, compared with RM202.7mil, or 32.77 sen per share, in FY12. Revenue was flat at around RM2.3bil.