KUALA LUMPUR: CIMB Equities Research is retaining its Add call for Top Glove Corporation with a higher target price (TP) of RM10 while the last traded price was RM9.
It said on Monday the higher TP was based on 22.4 times CY19F price-to-earnings (P/E) versus 19 times previously, a 20% discount to its target P/E for Hartalega
(28 times).
Top Glove’s solid 1QFY18 core net profit of RM101mil (+37.7% on-year) can be attributed to higher sales volume (+17% on-year) and an increase in selling prices (+2% on-year).
“This was despite a spike in raw material prices (latex: +12% on-year; nitrile butadiene: +3% on-year) and a weaker US$/RM (-0.1% on-year).
“Moving forward, management expects demand for gloves to remain strong in 1H18. Shortage of China-made vinyl gloves should persist in the near term due to the wintering period and the insufficient supply of natural gas,” it said.
CIMB Research said Top Glove also announced it had entered a sales and purchase agreement for Aspion.
The base acquisition price is RM1.4bil, valuing Aspion at 16.9 times P/E on FY18F target net profit.
The vendors provide a profit guarantee of RM100mil over two years to compensate for any shortfall in the net profit targets of RM81mil in FY18 and RM108mil in FY19.
“However, the acquisition price may increase on potential incentive payments in FY18-20F based on profit after tax of Finessis product sales (a new surgical glove range launched in 2017).
“We remain positive on Top Glove’s purchase of Aspion, targeted for completion by April 2018,” it said.
CIMB Research pointed out that besides being earnings-accretive, this acquisition will make Top Glove the largest surgical glove maker globally.
Top Glove can also tap Aspion’s technological know-how in the surgical glove space to produce higher-margin and better quality gloves.
In addition, the research house said Top Glove will have access to Aspion’s key developed markets, such as Japan, Europe and North America; the bulk of Top Glove’s surgical glove sales is to emerging markets.
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