Lower-than-expected earnings from Top Glove’s Aspion
KOTA KINABALU: While Top Glove Corporation Bhd’s (Top Glove) financial year 2018 (FY18) results indicate a healthy revenue boost due to higher sales volume growth across the board, the positive results were still lower-than-expected due to less contribution from Top Glove’s newest acquisition, Aspion Sdn Bhd (Aspion).
Excluding all of Aspion’s contribution and funding cost, the group’s FY18 revenue only increased by 17 per cent but its profit after tax and minority interest (PATAMI) rose to 37 per cent, implying that earnings was dragged down by Aspion.
According to MIDF Research (MIDF Amanah Investment Bnak Bhd) in a company report, the reason or the lower-than-expected results was due to an inflation in Aspion’s books that lead to over optimistic expectations for the surgical glove producer.
“With regard to Aspion, an investigation conducted by an independent accounting firm revealed that the previous financial years’ net profit had been inflated, which rendered the projections unreliable and unlikely to be achieved.
“To recall, as part of the incentivebased acquisition agreement to acquire Aspion, Top Glove was guaranteed a core profit after tax (PAT) for the first two years, RM80.9 million for the first year and RM108.3 million for the second year.
“However, management guided that FY18 earnings contribution from As pion came in between RM 20.0 to RM30.0 million. Meanwhile, we gather that higher 4QFY18 effective tax rate of 28.2 per cent was due to postponement of utilisation of tax incentives,” guided the research arm.
Kenanga Research (Kenanga Investment Bank Bhd) added that another reason for the lower-thanexpected was that Aspion’s earnings were dragged down by impact fro USD-denominated debt.
With that said, Kenanga research guides that Top Glove’ s management is now only expecting Aspion’s net profit contribution target of RM80 to 100 million to only be met in the next four to seven years.
“We believe this is a setback to Top Glove over the medium term in terms of longer payback period and funding cost incurred for the acquisition of Aspion for RM1.37 billion.”
“However, the group has done impairment test from the goodwill of RM1.2 billion arising from the acquisition of Aspion and no impairment is required.
“Management assessed the recoverable amount of Aspion based on its value- in-use, which in turn is determined based on cash flow projections or discounted cash flow (DCF method, zero terminal growth) of Aspion compared to the PER method used in the acquisition.
“In short, as long as the DCF parameters used for the recent impairment testing is conservative, this reduces the risk of a negative charge provided Top Glove is able to meet its own financial forecast,” said the research arm.
Looking ahead, Top glove’s future prospects still highly promising with their aggressive expansion plans to cater to the growing demand of disposable medical glove 3s worldwide.
Nonetheless, the lower-thanexpected earnings from Aspion have prompted MIDF Research to revise their FY19F earnings forecast downward by -3.7 per cent while revising FY20F earnings upward by +5 per cent to take into account additional contribution from the group’s planned new 32 production line factory in Thailand.