UOB Kay Hian Research keeps buy call on Top Glove, lower TP RM7.60

Last Friday, Top Glove proposed to issue 1.495 billion new shares, raising up to HK$14.95bil (or RM7.77bil) though a global offering.

KUALA LUMPUR: UOB Kay Hian Malaysia Research is retaining its Buy call on Top Glove Corporation Bhd with a lower target price of RM7.60 from RM10.40, which is independent of the listing in Hong Kong, as it rolls over its valuations to CY22.

Top Glove has proposed a share issuance as it pursues an additional primary listing on the Hong Kong Stock Exchange. It looks to raise up to RM7.77bil through an issuance of new shares, representing an enlarged share base of up to 18%.

“We like the intention to pursue the listing but the dilution appears punitive, of up to 12%, based on our estimates, ” it said.

UOB Kay Hian Research said it has already factored in Top Glove’s capacity expansion (eight new plants) that it intends to utilise a portion of its proceeds on.

Given Top Glove’s windfall earnings, the capacity expansion would have been well funded by internally generated funds.

“As a result, it appears that the corporate exercise is likely to be dilutive to EPS, depending on the extent of the uptake.

“Based on our estimates, FY22’s EPS could be diluted by up to 10.4% and 12.2% for overallotment not exercised and over-allotment exercised respectively, ” it said.

UOB Kay Hian Research said notwithstanding the additional funds raised, Top Glove’s net gearing in FY22 would have been at a comfortable -0.53 times (net cash).

The research house raised its FY22 earnings forecast by 36% as its previous average selling price (ASP) assumptions were too conservative (revised to US$38.8 per 1,000 pieces from US$33.9 per 1,000 pieces).

Key downside risks include: a) swift containment of the Covid-19 outbreak; and b) further disruption to its production or supply chain caused by the COVID-19 outbreak.

“Every -1% deviation from our RM4.10/US$ assumption translates into 1.2% and 1.8% declines to our FY21-22 EPS respectively," it said.

Commenting on the lower target price, it said that it rolled over its valuation period to CY22 from CY21. The revision in the target price is independent of Top Glove’s corporate exercise.

Its target price is based on a PE of 18.5 times (from 11 times) or close to -1.5 standard deviation of its five-year forward PE mean.

“The higher PE peg is tandem with the gradual normalisation of super-cycle earnings. We continue to like Top Glove for its attractive valuations and dividend yields, ” it said.

Last Friday, Top Glove proposed to issue 1.495 billion new shares, raising up to HK$14.95bil (or RM7.77bil) though a global offering.

The proposed issuance is with the intention to pursue a dual primary listing on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX).

This issuance includes an overallotment option for an additional 195 million new shares, if exercised in full.

This issuance is aimed at both retail and institutional investors in Hong Kong and global institutional investors. The issue price will be determined at a later date.

UOB Kay Hian Research pointed out that upon issuance of the new shares, Top Glove’s share based could be enlarged by up to 15.85% and 18.20%, depending if the over-allotment option is excercised in full or otherwise respectively.

The new shares will rank equally in all respects with existing issued shares.

Top Glove aims to broaden and enhance investors’ reach for Top Glove shares through an additional platform.

With the increased visibility, it hopes to a more effective form of capital raising for future expansion/corporate exercises. In turn, Top Glove hopes it would raise its brand awareness.

Use of proceeds primarily for capacity expansion. Approximately 60% of proceeds will be earmarked for production capacity expansion, land and a new nitrile latex processing plant. Remainder of proceeds will be aimed at R&D, ESG initiatives, M&A opportunities and working capital.

Aside from the approval of the shareholders of Top Glove, the company will have to obtain approval from Malaysia’s Securities Commission, Bursa Securities, HKEX, Securities and Futures Commission of Hong Kong.

Top Glove expects the corporate exercise to be completed by 2Q21 should conditions be met.

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