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PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 10 Jul 2020, 9:54 AM

 

Hartalega Holdings Berhad-Within Expectations

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Hartalega reported a full year core net profit of RM472.0m for FY20 after stripping out a fair value mark-to-market loss on derivatives of RM37.2m and the results came in within both our and streets’ projections at 101% and 104% respectively. The operating environment for glove makers has turned more positive following the global Covid-19 outbreak as it has led to a demand surge for rubber gloves, resulting in a severe shortage globally. As such, we raise our earnings forecast for FY21-22F by 13-15% to account for the impact of higher sales volume, higher ASP as well as margin expansion arising from lower raw material cost and operational efficiency. We also roll over our valuation to CY21F EPS, subsequently raising our TP to RM8.90, based on a PE multiple of 48x, which is at +2SD of its 5-year historical mean. We, however, are maintaining our Neutral call, as we believe the positives have been largely priced in by the market. On a separate note, Hartalega also announced a third interim dividend of 2.05sen per share.

  • Continuous improvement streak broken. Hartalega’s 4QFY20 revenue eased slightly by 2.3% QoQ, attributed to lower ASP (-2.4% QoQ) as the ASP was revised downwards mainly to pass on cost savings from lower raw material prices to customers. Sales volume was flat QoQ despite the commissioning of four new lines in Plant 6 from the month of January to March. We reckon the flat sales volume was partly due to the shorter working month in February. Utilization rate also continued to peak at 96% in 4QFY20. Given the lower raw material costs, Hartalega’s operating margins improved by 4ppts QoQ to 22.4%, while its operating profit grew by 12.7% QoQ to RM173.9m. As we strip out the impact of a higher-than-expected one-off fair value loss on derivative of RM41.9m, 4QFY20’s core net profit was up by 26% QoQ to RM152.8m.
  • Expansion plans. The Group has thus far commissioned 4 lines in Plant 6 (+4.7bn pcs pa), with another 8 more lines to be gradually commissioned going forward. Expansion works for Plant 6 has been halted previously due to MCO. However, following the relaxation of MCO, expansion works have slowly resumed. Hartalega targets to commission Plant 7’s (+3.4bn pcs pa) 1st line by end-CY20. Upon full commissioning of Plant 6 and Plant 7, Hartalega’s total installed capacity should reach 44.7bn pcs by the FY22F.
  • Better times ahead. The current Covid-19 pandemic situation has led to a critical global shortage of rubber gloves and for this reason, we expect Hartalega’s plant utilization rate to be well above 90% in the coming quarters, in order to capture and fulfill the sudden influx of orders. We also note that ASP has been on an uptrend across the sector and we are of view that the higher-than-expected ASP is sustainable for the coming quarters, given the current supply shortage. We adjust our earnings forecast for FY21-22F by 13-15% as we impute higher sales volume, higher ASP as well as margin expansion into our projections.

Source: PublicInvest Research - 19 May 2020

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