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Monday, April 23, 2018

Top Glove - Bonus and Bond Issue

Author: HLInvest | Publish date: Mon, 23 Apr 2018, 09:23 AM

Top Glove announced a 1:1 bonus issue and a USD300m Bond issue. We view the bond issue in a positive light as it will result in interest savings whilst enabling Top Glove to lock in a lower financing cost and restructure its debt composition to a longer tenure. The bond issuance will have negligible effect to gearing. The bonus issue is expected to provide a liquidity boost to the stock. Our forecast is unchanged and we maintain our HOLD rating with a TP of RM9.95 (TEBP RM4.98).

Top Glove announced that it will be undertaking (i) a proposed 1:1 bonus issue of up to 1.28bn new shares and (ii) a proposed issuance of guaranteed exchangeable bonds of up to USD300m. Upon completion of the bonus issue, total shares outstanding will be up to 2.56bn shares.

Use of Bond proceeds. The bulk of the proceeds will be utilized to pay down the groups existing borrowings (c.RM2bn as at 1HFY18) which were used for acquisitions and working capital. Recall that 90% of the Aspion acquisition was funded via borrowings of c.RM1.233bn in USD (USD310m). The bond issuance is expected to defer the group’s borrowings to a longer maturity schedule.

Gearing and interest cost savings. The overall impact to net gearing is expected to be neutral as the group is largely extending its borrowings schedule by converting a large portion of its current borrowings into a 5 year tenured bond. After the completion of the Aspion acquisition, net gearing stood at 0.76x. We can expect the group to save on its interest cost from this exercise. The group’s overall borrowing costs ranges from 2.5%-3.2% per annum. It is anticipated that bonds yield be lower than the groups existing borrowing costs as it has an equity feature.

Equity feature. The bonds may be exchanged into new Top Glove shares at the option of the bondholders during the exchange period at a conversion ratio that is still to be determined. We expect this option to have a dilutive effect to existing shareholders; however the quantum is expected to be minimal.

Shariah status. We expect the group’s Shariah status to be unaffected as the group will pare down its conventional borrowings and will convert its other borrowings into Shariah if need be to maintain compliance.

b Fundamentally, we are neutral on the bonus issue, however we do expect a liquidity boost to eventuate from this exercise. Our ex- TP will be adjusted to RM4.98. We view the bond program in a positive light as it will result in interest savings in the near term whilst enabling Top Glove to lock in a lower financing rate and restructure its debt composition to a longer tenure.

Forecast. Unchanged.

Maintain HOLD, TP: RM9.95. Our TP is based on a PE multiple to 25x or 2SD above historical mean pegged to CY19 earnings. The acquisition of Aspion which marks the group’s intent to dominate a high margin niche segment will propel Top Glove’s earnings. Nonetheless, at these levels we believe that the share price fully reflects this evolution. MaintainHOLD .

Source: Hong Leong Investment Bank Research - 23 Apr 2018

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