Not all gloom and doom for Top Glove

Legal action: Top Glove is now taking legal action against the vendors of Aspion and has claimed a sum of no less than RM714.86mil in overstatement of assets and valuations.

On July 5, the share price of the world’s largest glove manufacturer, Top Glove Corp Bhd, hit a record high and its market capitalisation rose to RM15.72bil.

Barely four days later, the stock tumbled 30% and hit limit-down, erasing nearly RM3.8bil off its market value in a single day.

The reason? Allegations of fradulent misrepresentation related to Aspion Sdn Bhd, a surgical glove specialist which Top Glove acquired in April 2018.

Top Glove said in a Bursa Malaysia filing on July 6 that there was a conspiracy to defraud the group by Aspion’s vendors during its acquisition of Aspion from former owner Adventa Capital Pte Ltd.

One of the vendors is Low Chin Guan, Adventa Bhd’s managing director, who is also an executive director of Top Glove. Low, the previous owner of Aspion, has since been suspended from Aspion’s operations.

Following an investigation, the Top Glove management found out that Aspion may not be able to achieve the profit guaranteed by Adventa Capital, due to inaccurate historical information provided earlier during the bidding process.

Adventa Capital had initially guaranteed a profit of RM81mil and RM108mil for Aspion’s financial years ending Oct 31, 2018 (FY18) and FY19, respectively.

Top Glove is now taking legal action against the vendors of Aspion and has claimed a sum of no less than RM714.86mil in overstatement of assets and valuations.

Breaking down the claim made by Top Glove, Aspion’s vendors are said to have deliberately overstated the value of assets by RM74.39mil and also overvalued Aspion by RM640.47mil.

Considering the alleged overstatement of assets and valuations, Top Glove may have paid double the value of Aspion, given the purchase price of RM1.37bil.

The allegation has turned investors jittery and concerned on whether the glove maker may have to make provision to account for the over-payment.

When contacted by StarBizWeek, Top Glove declined to comment further on the matter, pending the conclusion of the legal battle.

However, in an earlier stock exchange filing, the company says that its business operations remain resilient and scalable, with a healthy cashflow.

“The litigation will not impact Aspion’s business operations, which will continue as usual,” it says.

Analysts are largely mixed on Top Glove’s financials moving forward, as Aspion will likely deliver lower earnings than expected previously.

According to TA Securities Research, under the worst case scenario, Top Glove may have to impair the goodwill of possibly up to RM640.5mil, if the group loses the legal case.

“The management guided that the impairment will be made by comparing the present value of Aspion’s contribution for future 10 years and the goodwill arising from the acquisition.

“For best case scenario, where Top Glove wins the legal case, which will result in potentially RM714.9mil or more claims. We believe this would be positive on the company’s operating cash flow and gearing ratio, if the company uses the proceeds to pare down borrowings,” said the research firm in a note, adding that the ongoing litigations will not affect operations.

TA Securities Research has reiterated its “buy” call on Top Glove.

Meanwhile, UOB Kay Hian Malaysia Research estimates that Top Glove could see a significantly lower book value per share if the group undertakes impairment.

“Assuming the impairment charge is RM640mil (overvaluation figure), we estimate Top Glove’s book value per share of RM1.77 as at the third quarter of financial year of 2018 (FY18), may decline by 28%.

“We gathered the segregation of goodwill and intangibles exercise is still ongoing, therefore the financial impact cannot be reliably determined at this juncture.

“Nevertheless, management suggests strong evidence against the vendors and the likelihood of winning the case is high,” it says.

UOB Kay Hian Malaysia Research has cut its FY19-20 bottom line estimates by 6% to 8%, on the back of the impairment expectation. The research firm has maintained its “sell” call on the counter.

Despite the latest development, the acquisition of Aspion continues to be an important milestone for Top Glove, as the latter aims to be grow big in the medical-related products segment.

To note, Aspion is Top Glove’s largest buy to date since its initial public offering 17 years ago. With Aspion under its portfolio, Top Glove has added another feather to its cap, by also becoming the world’s largest surgical glove maker.

Currently, the management of Top Glove has taken back the entire control of Aspion’s operations, which was previously run by Low.

It is not all gloom and doom for Top Glove, amid the litigation related to Aspion. Despite the potentially lower-than-expected earnings contribution from Aspion, the company is not an empty shell.

Aspion’s surgical glove technology remains intact and its other physical assets are in place, therefore eliminating risks of possible operational interruptions.

Pointing out that Top Glove now has full access to Aspion after suspending Low from the company’s operations, TA Securities Research says that it is positive on the development. “According to the management, the company decided to be transparent on this matter instead of being silent on the operational issue that Aspion has and recognise the shortfall in profit guarantee. They reacted swiftly to verify the problems, instead of letting it drag on and then suffer two years later.

“Moving forward, the management is confident with its ability to improve Aspion’s operations and achieve its targeted profit numbers. We understand that Aspion is currently running at around 70% utilisation rate,” it says.

Meanwhile, AllianceDBS says in its note that Top Glove plans to add further value to Aspion’s plant with transfer of technologies.

However, this plan may take up to two to three years.

Aspion-aside, Top Glove continues to undertake organic expansion by ramping up its production capacity.

The glove maker is in the process of constructing two new manufacturing facilities namely, Factory 31 (operational by

July 2018) and Factory 32 (operational by early 2019).

The completion of both factories will lift the group’s total number of production lines by an additional 74 lines and production capacity by 7.4 billion gloves per annum or about 11% to 64.9 billion gloves. This makes Top Glove on track to achieve its 30% market share in the glove market by 2020.

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