By Xavier Kong
ANALYSTS share that the the amicable out-of-court settlement between Top Glove Corporation Bhd and Adventa Capital Pte Ltd over the purchase of Aspion Sdn Bhd is a positive outcome for the glove maker, though there are drawbacks to the settlement.
PublicInvest Research analyst Chua Siu Li views the settlement positively, maintaining an outperform call and a target price of RM8.60. On the other hand, AmInvestment Bank analyst Nafisah Azmi remains neutral on the development, downgrading Top Glove to a hold call, with an increased fair value of RM5.82 per share. Nafisah also tweaked their earnings forecast upwards for Top Glove’s 2020, 2021, and 2022 financial years.
“We continue to like Top Glove for its expansionary plans, focus and continual efforts in improving quality and operational efficiencies, and its position as the world’s largest rubber glove manufacturer. However, as its share price has rallied over 20% year-to-date and it is
currently trading at a 34 times price-to-earnings ratio, we believe that the stock is fully valued,” says Nafisah.
The settlement agreement entails Adventa Capital paying RM245 mil to Top Glove’s subsidiary Top Care Sdn Bhd, which will count as the full settlement and all parties will then drop their respective claims. Recall that Top Glove acquired Aspion in 2018 for RM1.37 bil. After the completion of the Aspion acquisition, Top Glove said it discovered irregularities in certain balance sheet items of Aspion, in particular, inventories and plant and machinery.
In the interim report by an independent accounting firm, an overstatement of inventory and plant and machinery in Aspion’s accounts amounting to RM74.4 mil was discovered. The interim report also said the acquisition price of Aspion was overstated by RM640.5 mil. The claim amount of RM714.9mil in legal proceedings consists of the overstatement of assets and the overvaluation.
Top Glove then instituted legal proceedings against Adventa Capital as well as Low Chin Guan, Wong Chin Toh and ACPL Sdn Bhd. There was also a countersuit by Low Chin Guan and Wong Chin Toh asking for special damages of RM396 mil and losses suffered as a result of inconvenience, harassment and costs by reason of freezing order proceedings.
“We are neutral on this development. Although this clears up the uncertainties with the material litigation, there is a risk of impairments on the balance of goodwill. The cash proceeds from the settlement will be netted off against the investment cost and the related goodwill will be reduced accordingly. The proceeds will improve the cash position of Top Glove,” says Nafisah.
Chua notes that Top Glove should receive the full settlement within the next 15 days, and agrees that the settlement will reduce part of the goodwill recorded in Top Glove’s books.
“After netting off, the balance of goodwill arising from Aspion’s acquisition should stand at about RM970 mil, and the remaining portion will still be subjected to impairment tests every year, as outlined in the accounting standards,” says Chua.
Chua adds that the profit guarantee attached to the Aspion deal is also no longer valid, considering Top Glove has gained full control over the management of Aspion.
Top Glove’s shares closed at RM5.70 on March 3, up 10 sen, with 20.5 million shares changing hands. – March 3, 2020
