Short Position - Tropicana’s glove share buy


First up is the glaring presence of Tan Sri Lim Wee Chai in this deal. Lim is the founder and controlling shareholder of Top Glove with a 26% stake. But in 2017, Lim acquired just over 10% of Tropicana Corp from the latter’s founder and controlling shareholder namely Tan Sri Danny Tan Chee Sing, spending at estimated RM140mil in that deal.

Tropicana’s glove share buy

Tropicana Corp Bhd is a well-established property developer in Malaysia, being in the business for more than two decades and having pioneered residential resort-style living. But its recent purchase of RM78.47mil worth of shares in Top Glove Corp Bhd is surprising, to say the least.

Is this the best use of money for a property developer and it can hardly be argued that buying into a rubber glove maker is synergistic with Tropicana Corp’s core business of property development.

Shouldn’t Tropicana be looking to use its cash by expanding its landbank at a time when there could be opportunities for good deals? Tropicana Corp says that the rationale for buying Top Glove shares is that it will be able to ride on the latter’s prospects.

Tropicana believes the prospects of glove making is bright due to “increased demand globally for gloves due to the on-going Covid-19 pandemic and also the growth in the global healthcare services industry.” But in looking into the risk-benefit analysis of this purchase of shares, one needs to take into consideration the following facts.

First up is the glaring presence of Tan Sri Lim Wee Chai in this deal. Lim is the founder and controlling shareholder of Top Glove with a 26% stake. But in 2017, Lim acquired just over 10% of Tropicana Corp from the latter’s founder and controlling shareholder namely Tan Sri Danny Tan Chee Sing, spending at estimated RM140mil in that deal.

Lim subsequently was made chairman of Tropicana Corp. In its filing with the stock exchange this week about the purchase of the shares, Tropicana Corp said that Lim had voluntarily abstained from deliberating and voting for the acquisition of the Top Glove shares.

Another fact to consider is that a significant number of companies are entering the rubber glove production game. And most significant of all is the entry of vaccines against Covid-19, which could potentially lead to a reduction in demand for rubber gloves.

No wonder some funds like the Employees Provident Fund (EPF) have been trimming their stakes in Top Glove since late last month. It should be noted also that Top Glove has spent a whopping RM1.28bil to buy back its shares since September, a record of sorts among Bursa Malaysia listed companies.

Note: In reference to our short position last week entitled “Top Glove’s share buybacks”, we wish to clarify that there is no requirement for treasury shares to be marked to market with changes between the cost and market price to be recognised in the profit and loss account.

Will the MGO really happen?

QL Resources Bhd is the ultimate producer of consumer goods. Managed by a mathematician, Dr Chia Song Kun, the company is into the manufacturing of marine products, livestock farming, palm oil plantations and a chain of stores under the “FamilyMart” brand.

Its produce from marine such as fish and crab-meat and livestock farming are sold through the “FamilyMart” chain of stores, among others. It’s a company that has all the ingredients of a “farm to plate” producer.

It has propelled QL Resources to becoming a RM15bil company.

Its valuation is more than four times that of Leong Hup International Bhd, the producer of chicken, animal feed and egg with a regional presence from Indonesia to Vietnam.

The reason is QL Resources has managed to sustain its financial performance and consistently paid dividends.

Amid the stellar background, QL Resources move to make a mandatory general offer (MGO) for its subsidiary, Boilermech Holdings Bhd, comes as a surprise.

It’s not because the offer itself is inferior, considering Boilermech’s net asset value 42 sen. But the fact that Boilermech has moved past its offer price of 95 sen per share raises questions on the rationale for the MGO.

Yesterday, Boilermech closed at 98 sen.

To recap, QL Resources had to make the general offer for the rest of the shares in Boilermech after it acquired an additional 4% in Boilermech from its managing director, Leong Yew Cheong, to push its interest up to 48.15%.

A condition to QL Resources’ MGO is that it must receive acceptance of more 50% of the shares. Considering that the share price closed at above 95 sen each yesterday, it is hard to fathom how the offer can be unconditional. Any shareholder wanting to exit the company through the MGO would sell the shares in the market since the offer price is higher. Unless the shareholder concerned is holding substantial blocks that cannot be disposed of in the market easily.

Only then will QL Resources be able to make the MGO unconditional.

A stinging cut

THE downgrade by Fitch Ratings of the credit rating of Malaysia was a surprise and it wasn’t. Inches of column space have been devoted to the possibility of a rating downgrade and concerns have been laid bare for all to see.

The crux of the government’s weak tax base was highlighted as a trigger for the cut in the ratings. That’s understandable as it has been weak but the government has recognised that and are looking at tax reforms to raise government revenue as a percentage of GDP and to rely less on oil and gas streams.

Fitch picking on political instability is a reach. There are a lot of countries where that is a concern especially during these trying times but in Malaysia’s case, it is unique given the history of longstanding stability that has been the bedrock of the country’s politics. The most important influence of such instability is that there has been little as the economy has rebounded strongly in the third quarter from the depths of the pandemic-ridden second quarter.

The government in its response carried more weight than the justification of a downgrade that took into concerns over ESG issues, which most developing countries have come to take cognisance of and are working towards addressing its weakness, especially Malaysia.

The fact that savings lives and livelihood has been the focus of our government, and many others throughout the world, is not something we should put blame on for the downgrade. Debt had to be incurred to stabilise the citizenry and to ensure that the fallout from the pandemic was contained as much as possible policy wise.

The simple fact is that the Malaysian government is not one that has disregarded the fundamentals of the economy. There has been great effort to balance things out to ensure that although much resources have been poured into helping Malaysians in time of need, there also has been emphasis and attention on how we recover from the crisis that will not hurt the long-term potential of the economy.

It is how strongly we bounce back that is more important than a rear view view of a ratings downgrade, but it is a reminder of what needs to happen to steer the country in the right direction.

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