Wednesday, 6 March 2013

Top Glove Corporation - Making a small investment in property

News  In an announcement to Bursa Malaysia, Top Glove said it had proposed to buy a 27% stake in Value Add Sdn Bhd (VA) for RM12.2m via: 1) subscribing to a first tranche of 270,000 ordinary shares of RM1.00 each and 5.83m Class ‘A’ preference shares (redeemable), which had been completed, and 2) subscribing to a second tranche of 2.43m ordinary shares of RM1.00 each and 3.67m Class ‘A’ preference shares (redeemable) in VA. The second tranche is expected to be completed within three months from the date of signing the Sale and Purchase Agreement (SPA) with T.S Law Reality Sdn Bhd. VA’s principal activity is property investment and is 68%-owned by Tan Sri Lim Wee Chai.

 VA has on 4 Mar 2013 entered into a SPA with T.S Law Reality Sdn Bhd. to acquire a commercial building known as East Wing of The Icon @ Tun Razak, including the rooftop of both the East and West Wing together with 301 car park bays with a gross build-up area of 278,182 sq ft for RM226m. The net lettable area is 267,907 sq ft.

Comments  We are neutral on this corporate development by Top Glove. Although this investment is not Top Glove’s core business, it does offer a better yield than the conventional fixed deposit rate.

 The property has an occupancy rate of 98% with its tenants being some of the well-known corporations like Samsung, Astro and Huawei.

 The property value works out to RM812 per sq ft, which appears fair. We understand that the net yield before tax from this property ranges between 6.0% and 6.4%, which is better yielding than conventional fixed deposits rate.

 The acquisition will not have a material impact on Top Glove’s net cash of RM197m as at 30 Nov 2012.

 Based on our back-of-envelope calculation, Top Glove can equity account VA’s rental income earnings, which we estimate to be <1% of our FY13E net profit.

Outlook  While we believe the declining trend in raw material prices could improve the glove makers’ margins including that of Top Glove, there are also headwinds ahead, which include the strengthening trend of Ringgit vs. USD, higher natural gas prices and the minimum wage policy. We understand that 50% of its workforce or a total of 3,850 workers falls below the new minimum wage of RM900/month and expect their salaries to increase by 50%. Ceteris paribus, assuming ‘a no cost pass-through’ scenario, the minimum wage policy is expected to hit Top Glove’s bottom line by 9.0% based on our back-of-the-envelope calculation. Furthermore, feedstock latex prices are expected to move upwards in 1Q CY2013 due to the low production period.

Forecast  No changes to our FY13 and FY14 forecasts.

Rating   Maintain MARKET PERFORM

Valuation  We are maintaining our target price of RM6.00 based on 15x its FY14E EPS.

Risks  Higher than expected input raw material cost.
 Lower than expected volume sales.

Source: Kenanga

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