By Devanesan Evanson
Top Glove Corporation Bhd’s share buyback activities have taken a new twist recently when property developer Tropicana Corporation Bhd announced that it had snapped up 11.25 million Top Glove shares worth RM73.06 mil on Dec 2.
Top Glove’s founder and executive chairman Tan Sri Lim Wee Chai is also the non-independent non-executive chairman of Tropicana. Lim holds a 11.07% stake in Tropicana.
In a filing to Bursa Malaysia dated Dec 3, Tropicana said the purchase of Top Glove shares was conducted “at prevailing market prices from the open market” via its indirect wholly-owned Desiran Reality Sdn Bhd. This translated into an average price of RM6.49 per share, representing about a 0.14% stake in Top Glove.
In justifying its action, Tropicana said the purchase of Top Glove shares would enable it to capitalise on the investment in Top Glove “with favourable long-term prospects” of the glove industry due to its high global demand.
“The acquisition can allow Tropicana to benefit from the prospects of the manufacturing and trading of gloves which is largely contributed by increased demand globally for gloves due to the on-going COVID-19 pandemic and also the growth in the global healthcare services industry,” noted the property developer.
Lim who holds an 11.07% stake in Tropicana, is also the chairman and founder of Top Glove where he holds a 25.68% stake.
The glove tycoon had bought into Tropicana in October 2017 from Tan Sri Danny Tan Chee Sing and his two related companies, Golden Diversity Sdn Bhd and Aliran Firasat Sdn Bhd, for an undisclosed sum.
However, Tropicana’s shareholders may not sit well with the fact that the acquisition of Top Glove shares was funded by internally generated funds, especially since the property developer does not seem to have a ‘healthy war chest’ in view of the prolonged soft property market.
As of Sept 30, Tropicana’s cash balance amounted to RM703.8 mil. However, its long-term borrowings swelled to RM2.82 bil from RM1.57 bil a year ago, while its short-term liabilities shrank to RM528.7 mil from RM942.2 mil. On top of that, the developer has issued perpetual bonds of RM248.2 mil.
Query from Bursa Malaysia
Further to its Dec 3 announcement, Tropicana received a query from Bursa Malaysia which sought additional information about its acquisition of Top Glove shares.
Of interest is the issue of conflicting core businesses to which Tropicana reiterated that while the glove industry remains a “favourable long-term prospects”, it has chosen to invest in Top Glove instead of other glove companies as Top Glove is the world’s largest manufacturer of gloves. Top Glove currently captures around 26% of the world market share for rubber gloves.
“Top Glove has also demonstrated steady growth with a compound annual growth rate of 23.1% for revenue and 28.2% for profit after tax over the past 20 years,” Tropicana further rationalised.
Notably, Lim who is deemed an interested party in the acquisition exercise by virtue of his interest in Top Glove and Tropicana, has abstained from all deliberations and voting concerning the acquisition.
Additionally, Tropicana’s audit committee holds the view that the exercise is:
- In the best interest of the company;
- Fair, reasonable and on normal commercial terms; and
- Not detrimental to the interest of the minority shareholders.
A wise investment?
In all fairness, Tropicana’s purchase of Top Glove shares can be deemed as a strategic investment if the company has matching risk appetite for the myriad of business challenges that Top Glove is currently encountering.
To name a few, Top Glove is shrouded by myriad accusations of labour abuses. On top of this, the Ministry of Human Resources has opened 19 investigation papers against six subsidiaries of Top Glove over offences involving workers’ dormitories.
The enforcement operations were carried out on Top Gloves’ worker dormitories in Kedah, Perak, Kelantan, Negeri Sembilan and Johor after the discovery of a COVID-19 cluster at a Top Glove workers dormitory in Meru, Klang.
To rub salt into its wound, JP Morgan recently issued a startling research report on the glove maker with an “underweight” recommendation and a fair value of RM3.50. To be fair, this valuation was an outlier as most other research houses had more optimistic fair values of more than double JP Morgan’s fair value. Top Glove was traded at RM6.64 on Dec 18.
The research house reasoned that the supernormal growth cycle for glove makers has passed, and the anticipation of a huge oversupply in the market as glove demand decelerates in tandem with the accelerating pace of testing for COVID-19.
For the record, JP Morgan has also initiated coverage of Top Glove’s competitors Hartalega Holdings Bhd and Kossan Rubber Industries Bhd with similar “underweight” ratings.
When the market opened on Dec 14, Top Glove shares slid 60 sen or 8.7% to close at RM6.30 due to the downgrade by JP Morgan. – Dec 21, 2020
Devanesan Evanson is the CEO of the Minority Shareholders Watch Group, an independent research organisation to encourage good governance among public listed companies with the objective of raising shareholder value over time. He can be reached at [email protected].
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
