This article first appeared in The Edge Malaysia Weekly on March 15, 2021 - March 21, 2021

WITH two successful listings in the bag — a primary listing on the Main Market of Bursa Malaysia and a secondary listing on the Singapore Exchange — Top Glove Corp Bhd now hopes to score a hat-trick with a third one, on the Hong Kong Stock Exchange (HKEX).

However, analysts have not thrown their support behind Top Glove’s move for a primary listing in Hong Kong, saying that it will dilute the group’s earnings per share (EPS).

“It appears that the corporate exercise is likely to be dilutive to EPS, depending on the extent of the uptake. Based on our estimates, Top Glove’s financial year ending Aug 31, 2022’s (FY2022) EPS could be diluted by up to 10.4% and 12.2% for overallotment not exercised and overallotment exercised respectively,” UOB Kay Hian Research said in a note last Wednesday.

“Notwithstanding the additional funds raised, Top Glove’s net gearing in FY2022 would have been at a comfortable -0.53 times (net cash). While we are positive over Top Glove’s intention to pursue an additional listing on HKEX, the potential dilution to EPS appears particularly punitive,” it adds.

Top Glove’s dual primary listing on HKEX entails the issuance of up to 1.495 billion new shares, representing 18.65% of the group’s total issued shares of 8.02 billion. The 1.495 billion new shares include an additional 195 million shares that may be issued under the overallotment option, if the shares are exercised in full. The whole exercise is expected to raise up to RM7.7 billion, the bulk of which will go towards expansion of production capacity.

Top Glove says that an EPS dilution cannot be ruled out in the short term, but qualifies that the effect will be mitigated by the group’s strong earnings growth.

“Based on the proposal as per our announcement, the dilution envisaged was within the range of 13.9% to 15.7%. However, as we are going through a period of exceptionally strong profit, the dilution effect will be mitigated and the EPS growth expected is still around 390%,” it says.

Top Glove’s net profit for 2QFY2021 rose 20.76% quarter-on-quarter (q-o-q) to RM2.87 billion, while quarterly revenue grew 12.74% to a record RM5.37 billion.

Private investor and former investment banker Ian Yoong is of the view that the dilution in Top Glove’s net EPS as a result of its issuing new shares for the initial public offering (IPO) on HKEX has been mitigated by its share buybacks over the past 12 months and the record profit expected for FY2021.

“Top Glove recently announced a generous dividend of 25.2 sen to reward its shareholders pre-listing on HKEX. The listing on HKEX will raise RM7.7 billion, which will be a useful war-chest for merger and acquisition (M&A) activities.

“It is likely that Top Glove will have a decent share price performance on its debut on HKEX on the basis of recent IPOs’ [performance]. There could be some pull effect on Top Glove’s share price in the run-up to its listing on HKEX in May or June this year,” he says.

TA Investment Management chief investment officer Choo Swee Kee says the HKEX listing will only make sense in the longer term as it is unlikely to impact the company’s prospects in the short term.

“Only time will tell whether, in the longer term, it would open up more markets or bring in new business orders or bring it to a new valuation value. However, in the short term, it does not make sense to existing investors as to why [there is] the need to issue new shares when the company is making record profits and generating record cash flows,” he explains.

During its analyst and media briefing last week, Top Glove addressed the question of why it needs to raise cash through the listing now despite its strong cash position, saying that it was done to take advantage of optimal market conditions, and to avoid having to raise funds when the cost of funding is high and there is a lack of liquidity in the market.

“The current conditions are right for us to raise funds via equity, as Top Glove’s share price valuation is at a good value. Existing cash from strong earnings of the past few quarters will be used to reward existing shareholders via dividends,” the group said.

In the final quarter of last year, Top Glove spent RM1.28 billion on share buybacks — RM354.74 million in September, RM802.55 million in November and RM123.5 million in December.

On whether it will continue to buy back shares this year, the group said that “a more structured share buyback policy has been put in place, and any share buyback undertaken will be in accordance to the criteria set”.

Some quarters argue, however, that this has not really helped its share price as Top Glove shares have declined 15% year to date to RM5.20 last Friday. The buybacks were done at an average of RM7 per share.

“The share buybacks were conducted at a time when we considered our valuation was low in view of the strong earnings, coupled with a high dividend yield in comparison with the interest from fixed deposits or money market placements.

“The share buybacks were conducted with a view to maximise shareholders’ return and value,” said Top Glove.

On hindsight, the timing of the share buybacks could have been better, says Yoong.

“The management nevertheless cannot be blamed for the timing of the share buybacks as analysts and investors were super bullish in the euphoria then.

“Tan Sri [Dr Lim Wee Chai] owns 26% of the company. He and Top Glove managers and directors bought Top Glove shares in their personal capacity at about the same time of the share buybacks. This was an indication of their confidence in Top Glove’s share price performance going forward then.

“The company experienced negative publicity when news of its treatment of foreign workers and outbreaks of Covid-19 among its workers surfaced. This double whammy of negative news badly impacted Top Glove’s share price performance. This has been compounded by downgrades in the target price of Top Glove by sell-side analysts,” he says.

TA’s Choo is of the view that given Top Glove’s capacity expansion plans, the cash could have been more efficiently used to build more factories rather than for share buybacks.

“Furthermore, Top Glove’s current market price is not exactly at a historical low. It is still 300% above its share price in early 2020, before the Covid-19 pandemic. We would have preferred if the company’s management had waited for market conditions to normalise back to a situation with no pandemic before deciding on share buybacks,” he says.

Top Glove still remains a “buy” for analysts, with 14 out of 19 analysts covering the stock still having a “buy” call on it. They have lower target prices ranging from RM6.65 to RM8.50. Nevertheless, Top Glove is still expanding aggressively, with RM10 billion in capital expenditure earmarked for FY2021 to FY2025.

By Dec 31, 2024, the group hopes to increase its capacity to 47 glove factories producing 205 billion pieces of gloves per year, from 36 factories producing 93 billion pieces per year currently. Its aggressive expansion plans resonate with its desire to float its shares on the HKEX.

“In the longer term, the dual listing as compared to a secondary listing is an indication of Top Glove management’s global ambition to be transformed into a multinational corporation, leading to more cross-border M&A activity.

“A dual listing on HKEX, a global top 10 financial market by market capitalisation, confers prestige and added credibility, and a platform for greater business expansion to China, which is expected to be the largest economy in the world by 2028 to 2030,” says Yoong.

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