RHB Research retains Buy for Top Glove, TP RM5.80

KUALA LUMPUR: RHB Research Institute is retaining its Buy for Top Glove Corporation with a new discounted cashflow-derived target price of RM5.80 with earnings estimates maintained.

It said on Tuesday it had increased its Beta assumption in its discounted cashflow valuation to reflect short-term share price volatility due to the stock borrow arrangement.

“Our new TP values the stock at FY20F P/E of 23.9 times, or 1.1SD above its mean valuation. We believe the premium valuation is justified due to the counter’s recent inclusion into FBM KLCI (effective Dec 24, 2018), as well as strong double-digit earnings growth for FY19F-20F. Key downside risks: industry overcapacity, currency movements, and volatile raw material prices,” it said.

On Monday, Top Glove announced it had listed exchangeable bonds (EBs) – principal amount: US$200mil – on Bursa Securities (under the exempt regime) and Singapore Exchange Trading.

This is the firm’s first EB and a stock borrow arrangement with Top Glove’s major shareholders was introduced in connection with this issuance.

“We gathered that the move (stock borrow arrangement) was aimed at attracting a larger investor base for the EBs while ensuring the terms of the bonds would be more attractive and beneficial to the company,” it said.

Note that the stock borrow allows bond investors to hedge their positions when subscribing to the EBs. According to the announcement, the stock borrow available only comprises 2% of Top Glove’s total shares.

During the initial period, there may be some downward impact on the share price due to regulated short-selling activities. The company expects this impact to be temporary.

“We gathered that the EBs is priced at a 2% pa coupon for a 5-year period. As the coupon rate is lower than Top Glove’s current interest rate of c.4% annually, the difference of 2% on RM800mil could result in potential interest savings of RM16mil.

“As 98.3% of the net proceeds of RM814m will be used to repay its existing debts, we do not expect the EBs issuance to change Top Glove’s net gearing.

“The EBs holders are allowed to convert their bonds into company shares when the share price increases above RM6.20. Consequently, we expect limited EPS dilution in the near term,” RHB Research said.

Source : TheStar