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Monday, July 9, 2018

Top Glove Corporation Berhad - Overpaying For Aspion?

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Last Friday, Top Glove announced that the company and its wholly-owned subsidiary, Top Care Sdn Bhd, have taken legal proceedings against Adventa Capital, ACPL, Low Chin Guan and Wong Chin Toh, claiming for a sum of not less than RM714.9m. The claim arose from a conspiracy to defraud Top Glove and fraudulent misrepresentations made by Aspion’s directors Low Chin Guan and Wong Chin Toh, which resulted in Top Glove agreeing to purchase Aspion for RM1.37bn. No further details of the proceedings were revealed as it is now a legal matter. We maintain our earnings forecast pending more clarity on the matter. However, we downgrade Top Glove to Trading Sell as we believe share price will react negatively to this news and will remain under pressure pending further clarification by management. Our TP remains unchanged at RM10.65.
  • Claiming back not less than 52% of the purchase consideration. Top Glove and its wholly-owned unit Top Care Sdn Bhd have initiated a writ action against two directors of Aspion, Low Chin Guan and Wong Chin Toh, for a sum of no less than RM714.86m. The amount claimed represents about 52% of the total RM1.37bn purchase consideration. The Kuala Lumpur High Court had granted an ex-parte Mareva injunction restraining Low Chin Guan and Wong Chin Toh from disposing their assets in Malaysia up to the value of RM714.9m and ACPL up to the value of RM72.3m until trial or further order. Meanwhile, the Group also initiated two separate originating summons against Aspion’s former parent company, Adventa Capital Pte Ltd to restrain the latter from disposing of its assets in Malaysia and Singapore by the same amount.
  • Potential lower-than-expected contribution from Aspion? Note that Top Glove is not cancelling the whole deal, which mean that Aspion could still contribute to the Group but the contribution may not be as great as expected. To recap, the acquisition of Aspion comes with a core net profit target of RM80.9m and RM108.3m for Aspion FY18 and FY19 (FYE 31 October), and Adventa Capital will reimburse Top Glove for any shortfall in the core net profit for FY18 and FY19, up to an aggregate maximum limit of RM100.0m. We believe the surprise move sends a signal of a potential lower-than-expected contribution from Aspion. We maintain our earnings forecast pending more clarity on the matter. The downside risk to our earnings estimates will be lower-than expected contribution from Aspion and a long-drawn litigation process. The inter partes hearing of the Mareva Application is fixed for 13 July 2018.
Source: PublicInvest Research - 9 Jul 2018

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