Top Glove Corp Bhd (July 18, RM5.43)
Maintain trading buy at target price of RM5.71: Top Glove announced that it has entered into a conditional sale and purchase agreement to acquire the entire stake in GMP Medicare Sdn Bhd for a cash consideration of RM24.1 million.

The acquisition will be financed via internally generated funds. GMP currently owns and operates a factory which produces latex gloves (powder-free, surgical and dental gloves). The factory is situated on 6.8ha of land in Lukut, Negri Sembilan.

We understand that the factory has 11 production lines with a production capacity of 500 million pieces per year. The purchase consideration of RM24.1 million was agreed upon based on a fair market value.

We are positive on the acquisition as it is in line with the group’s expansion plan to increase its global market share to 30% from 25% currently over the next three years.

In addition, while Top Glove’s overall utilisation rates are currently at 70%, we understand that production of powder-free gloves is already running at optimum utilisation rates.

Thus, despite the small size of the acquisition, it is still a quicker way to expand capacity for powder-free gloves. We also note that the six-month timeline to the completion of the deal is shorter than the one to 1½ years required to commission a factory.

In total, the acquisition would add approximately 570 million pieces per year to Top Glove’s existing capacity of 38.5 billion pieces and would begin contributing to earnings from FY13 onwards.

While the additional capacity arising from the acquisition is relatively small, we note there is still an additional 3.2ha of vacant land on the site, which can be used for further capacity expansion.

The key risk, in our view, is if the acquisition fails to go through. We raise our financial year 2013 (FY13) to FY14 earnings slightly by 1.3% per year after we factor in the additional capacity arising from GMP.

Our fair value is raised to RM5.71 (from RM5.64) based on unchanged target calendar year 2013 price-earnings ratio (PER) of 15.5 times. We believe the recent weakness in latex prices and strengthening in US dollar to ringgit rate suggest greater impetus for the company’s acquisition.

As such, we are maintaining our “trading buy” call on the stock. — RHB Research, July 18

This article appeared in The Edge Financial Daily on July 19, 2012.