Stock Name: TOPGLOV
Company Name: TOP GLOVE CORPORATION BHD
Rubber gloves sector
Maintain neutral: YTY Industry Holdings Sdn Bhd has rejected Latexx Partners Bhd's offer to merge their businesses. Given its strong nitrile capacity, YTY continues to appeal to the bigger glove producers (Top Glove Corp Bhd, Hartalega Holdings Bhd) and private equity funds. With the Latexx-YTY deal off, we believe the bigger glovemakers will take another look at YTY for the overnight capacity/earnings enhancement and longer-term value creation potential. While pricing can be the deterrent, it is still earnings accretive. We believe mergers and acquisitions in the sector are not over yet.
On July 21 (a day before the deadline for Latexx to execute the sales and purchase agreement), Latexx went back to YTY and indicated its intention to make a revised offer (from the original RM1.25 billion), based on its findings from the 45-day due diligence. YTY rejected the offer on the very next day (July 22). We are puzzled about the rejection as, at the indicative revised offer price, we understand that Latexx is still the highest bidder for YTY among the glovemakers and private equity funds.
In our view, YTY shareholders are still keen to sell the business but the sale could be hampered by the fact that it could still be much cheaper for the other glovemakers to build new production lines from scratch rather than to pay an estimated nine times forward price-earnings ratio (PER) at a RM1.25 billion price tag. We also do not see any technology value-add to the acquirers as YTY's technology is similar to the industry with semi-auto stripping and packaging systems (except for Hartalega, which has the most advanced technology).
However, to build YTY's capacity overnight (11% of global nitrile glove market share) will create a huge supply glut in the industry. Given that the other glovemakers are all vying for bigger market shares, they may relook at YTY. Acquisition of YTY should result in an overnight capacity enhancement, enlarged earnings base and longer-term value creation via economies of scale and pricing power.
Potential buyers are Top Glove and Hartalega, given their respective valuations, ambitions and businesses. Based on our estimation, at a RM1.25 billion price tag for YTY, Top Glove could still see a huge earnings per share enhancement of 45% (YTY's profitability is almost on par with the former) while Hartalega may see a moderate 8% accretion. Nevertheless, we maintain our calls on Top Glove (sell, target price: RM4.40) and Hartalega (buy, TP: RM6.80), as the possibility of an acquisition may be premature. ' Maybank IB Research, July 25
This article appeared in The Edge Financial Daily, July 26, 2011.
Company Name: TOP GLOVE CORPORATION BHD
| Research House: MAYBANK | Price Call: SELL | Target Price: 4.40 |
Rubber gloves sector
Maintain neutral: YTY Industry Holdings Sdn Bhd has rejected Latexx Partners Bhd's offer to merge their businesses. Given its strong nitrile capacity, YTY continues to appeal to the bigger glove producers (Top Glove Corp Bhd, Hartalega Holdings Bhd) and private equity funds. With the Latexx-YTY deal off, we believe the bigger glovemakers will take another look at YTY for the overnight capacity/earnings enhancement and longer-term value creation potential. While pricing can be the deterrent, it is still earnings accretive. We believe mergers and acquisitions in the sector are not over yet.
On July 21 (a day before the deadline for Latexx to execute the sales and purchase agreement), Latexx went back to YTY and indicated its intention to make a revised offer (from the original RM1.25 billion), based on its findings from the 45-day due diligence. YTY rejected the offer on the very next day (July 22). We are puzzled about the rejection as, at the indicative revised offer price, we understand that Latexx is still the highest bidder for YTY among the glovemakers and private equity funds.
In our view, YTY shareholders are still keen to sell the business but the sale could be hampered by the fact that it could still be much cheaper for the other glovemakers to build new production lines from scratch rather than to pay an estimated nine times forward price-earnings ratio (PER) at a RM1.25 billion price tag. We also do not see any technology value-add to the acquirers as YTY's technology is similar to the industry with semi-auto stripping and packaging systems (except for Hartalega, which has the most advanced technology).
However, to build YTY's capacity overnight (11% of global nitrile glove market share) will create a huge supply glut in the industry. Given that the other glovemakers are all vying for bigger market shares, they may relook at YTY. Acquisition of YTY should result in an overnight capacity enhancement, enlarged earnings base and longer-term value creation via economies of scale and pricing power.
Potential buyers are Top Glove and Hartalega, given their respective valuations, ambitions and businesses. Based on our estimation, at a RM1.25 billion price tag for YTY, Top Glove could still see a huge earnings per share enhancement of 45% (YTY's profitability is almost on par with the former) while Hartalega may see a moderate 8% accretion. Nevertheless, we maintain our calls on Top Glove (sell, target price: RM4.40) and Hartalega (buy, TP: RM6.80), as the possibility of an acquisition may be premature. ' Maybank IB Research, July 25
This article appeared in The Edge Financial Daily, July 26, 2011.
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