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KUALA LUMPUR (March 2): Top Glove Corp Bhd’s share price plunged below RM5 on Monday, a key psychological support level.
The stock fell to its lowest level since the end of June last year to close at RM4.90, 34 sen or 6.5% less. Around RM 2.78 billion was removed from Top Glove’s market capitalization in a single trading day.
Glove stocks in Bursa Malaysia have already declined amid expectations that glove demand will normalize sooner rather than later as more countries have started their vaccination programs in recent weeks.
The group’s announcement on Friday (February 26) that it had submitted an application for a double primary listing on the Hong Kong Stock Exchange (HKEx) appeared to have added fuel to the sale.
Like it or not, the stock price drop is a reflection of the poor response to Top Glove’s proposal. Top Glove is already listed on the Singapore Stock Exchange, in addition to Bursa Malaysia. Your SGX trading volume is much lower compared to your home.
Those who have followed the news stream would not be surprised by the announcement, as Top Glove boss Tan Sri Lim Wee Chai, the group’s majority shareholder and CEO, revealed the intention to go public a few months ago.
Still, few would have expected Top Glove to issue 1,495 billion new shares, equivalent to 18.23% of its existing issue capital of 8.2 billion shares, to raise a whopping RM7.7 billion ( HK $ 14.95 billion) of fresh capital.
Valuation aside, earnings dilution is inevitable if Top Glove sells 1.495 million new shares in Hong Kong.
Why does Top Glove need to raise so much capital, given it has a large amount of net cash?
The world’s largest glove maker wants to expand its war chest to build new factories and improve worker welfare.
With the RM7.7 billion raised, Top Glove intends to spend RM4.61 billion for the expansion of production capacity and the development of a data-driven manufacturing system, including the addition of 333 production lines. doubles to increase its annual production capacity to 193 billion pieces of gloves. by the end of 2025.
It will also allocate RM390 million for environmental, social and corporate governance practices and initiatives, of which RM230 million will be used to improve worker well-being. [see table]
Expanding capacity is deemed necessary to drive future earnings growth while improving worker welfare to improve outlook and corporate governance.
That said, Top Glove’s aggressive expansion plans have drawn attention as growth in glove demand is anticipated to normalize soon as the Covid-19 pandemic should be better contained with the launch of vaccines.
In addition, the question arises as to whether Top Glove should make the listing that will cause a dilution of stake and earnings.
Let’s take a look at Top Glove’s balance sheet.
Given its strong cash flow generated by strong sales, Top Glove has prudently and substantially reduced its loans from RM2 496 billion, including long-term debts of RM1305 billion, as of November 30, 2019, to RM433.86 million a year. later.
Debt repayments have placed Top Glove in an enviable net cash position of RM775.14 million as of November 30, 2020. Its gross cash balance increased to a record RM1.209 billion, down from just RM154, 21 million a year ago.
On top of that, Top Glove has investments in securities worth RM2.678 billion as of November 30, 2020. Some quarters commented that the fact that the group could afford to spend RM1.4 billion on share buybacks is already a good indicator of its growth. cash chest.
The glove maker’s cash flow is expected to rise, in line with its record earnings over the next three financial quarters, or more.
According to Hong Leong Investment Bank forecasts, Top Glove’s cash balance will skyrocket to RM3.58 billion in the financial year ending August 31, 2022 (FY22) and RM4.79 billion in FY23.
It is worth noting that Top Glove is committed to a special 20% dividend for the remaining three financial quarters of fiscal year 21. The special dividend will be in addition to its existing dividend policy of a 50% pay rate on earnings after of taxes and minority interests (PATAMI), according to its stock market presentation dated January 4.
The dividend commitment is another evidence of your confidence in a strong and steady cash flow.
The board, meanwhile, has explained that the proposed issuance of new shares will allow the company to raise fresh capital without having to make a cash call from its existing shareholders to finance expansions, which are expected to boost earnings.
From this perspective, should current shareholders be happy that the board has found a way around a rights problem that forces them to shell out extra money?
To answer this question, the board may need to demonstrate to shareholders that the cost of borrowing in today’s low interest rate environment is much more expensive than the costs of stocks.
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