KUALA LUMPUR (March 1): Top Glove Corp Bhd's share price had dropped 7.6% or 40 sen to RM4.84 at the time of writing today, wiping off RM3.28 billion of its market capitalisation, following news that the glove maker wants to raise RM7.7 billion via a primary dual listing in Hong Kong.

Analysts foresee Top Glove’s primary dual listing on the Hong Kong Exchange (HKEX) to dilute its financial year ending Aug 31, 2021 (FY21) to FY23 earnings per share (EPS).

CGS-CIMB Research analyst Walter Aw said he is negative on the exercise as it is EPS dilutive.

Assuming the overallotment option is exercised, he estimated this exercise will reduce the group’s FY21 to FY23 EPS by 11.2% to 15.1%.

“In our view, this fundraising exercise is avoidable as Top Glove’s expected stellar FY21 to FY22 results should be able to support its capex (capital expenditure) plans, while it has zero gearing currently.

“Bear in mind that Top Glove recently announced a 20% special dividend for the remaining three quarters of FY21 on top of an existing dividend policy of 50%. Also, it spent RM1.4 billion to conduct share buy-backs of 200 million shares in the past one year,” he said in a note.

While retaining the research house's "add" call on Top Glove, Aw lowered its target price (TP) to RM7.80 from RM8.90.

In JP Morgan's estimation, meanwhile, the potential dilution is 16.22% to 18.65%.

"One of the stated reasons for this IPO (initial public offering) is to raise funds for expansion. The announced capital raising is approximately [of] the same magnitude as its plans to pay out 70% of 2Q-4QFY21 (fourth quarter ending Aug 31, 2021) against the consensus FY21E profit of RM10 billion (estimated). The dilution from the HKEX IPO might put downward pressure on its share price in the near term. We thus reiterate our 'underweight' rating and TP of RM3.50," JP Morgan wrote in separate note.

JP Morgan's TP of RM3.50 for end-2021 is based on 18 times its target price-earnings (P/E). "We referred to the 2015-19 period to derive our glove sector average target P/E as Malaysian glove producers experienced volume-led profit growth during that period. While we expect glove prices to normalise post Covid-19, we forecast volume to sustain [a] 20% growth. Moreover, our post Covid-19 glove price is 27% higher than pre Covid-19 levels," it added.

Likewise, MIDF Research analyst Ng Bei Shan said the exercise is expected to cause a dilutive impact of 15.5% and 15.4% respectively on Top Glove's FY22 and FY23 EPS.

“We do not expect a surge in production capacity until the end of 2024 except for its ongoing production expansion as the new plants are likely to be funded through the issuance of new shares,” she said.

She also expects minimal impact on Top Glove's FY21 EPS as the exercise is slated for completion by June, which is about two months away from the financial year end on Aug 31, 2021.

“We think that the dilutive impact in the near term may be a slight negative, which might be offset by better-than-expected industry prospects and operational efficiency,” she said.

In the long run, she opined that the listing on HKEX is a move that the company takes to further improve its international profile.

She maintained her "buy" call on the stock, with an unchanged TP of RM8.29.

On the other hand, Hong Leong Investment Bank (HLIB) Research analyst Gan Huan Wen said he is neutral on the exercise.

“It would open up Top Glove shares to be purchased by a larger investor base; it would also dilute existing shareholders, resulting in a lower dividend yield,” he said.

Based on his back-of-the-envelope calculations, he said assuming issuance of 1.495 billion new shares, the group’s FY21 dividend yield would fall from 17.7% to 14.9%, based on a 70% payout ratio of FY21 earnings.

He maintained his "buy" call on the stock with an unchanged TP of RM8.06.

AmInvestment Bank Research analyst Thong Pak Leng, meanwhile, said the issuance of new shares will result in earnings dilution and reduce the research house's EPS forecasts for FY21 to FY23 by 14.7%, 13.2% and 12.7% respectively.

“Hence, we lower our fair value (FV) from RM6.50 to RM5.63 based on 2022 EPS over an unchanged price-earnings ratio (PER) of 23 times. As there is little potential upside, we maintain our 'hold' recommendation on Top Glove,” he said.

TA Securities analyst Tan Kong Jin, however, is positive the proposed dual primary listing as it increases Top Glove’s investor base in Hong Kong and North Asia.

“Moreover, the Hong Kong stock exchange is much more developed than Bursa Malaysia in terms of market depth and breadth,” he said.

Based on his back-of-the-envelope calculations, he said assuming completion of the exercise by end-FY21, this would bolster the company's net cash position from RM1.2 billion as at end-1QFY21 to over RM8.9 billion.

“However, we estimate EPS dilution of about 15% for FY21 post completion of the dual-listing exercise,” he added.