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PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 23 Oct 2019, 9:39 AM

 

Hartalega Holdings Berhad - Light at the End of the Tunnel

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We believe the oversupply episode faced by the glove makers previously is now done and dusted and the operating environment is improving. Based on our channel check, the glove makers are experiencing an uptick in demand for their gloves. We believe the pickup in sales was partially due to the US China trade war as some Chinese manufacturers are diverting their orders to other countries, in order to avoid tariffs imposed by the US government. However, due to the delay in the commissioning of Plant 6, Hartalega is not able to fully capture and benefit from the demand uptick in FY20F. We revise down our FY20F earnings by 14% after factoring in lower margin due to higher cost per unit. For FY21-22F, we are forecasting 10-14% earnings growth, mainly due to higher sales volume as capacity expansion kicks in. Considering the improving operating landscape as we move into 2020, we raise our TP to RM5.20 (from RM4.00 previously), rolling over our valuation to CY20F and pegging a higher PE multiple of 35x, which is near +1.0 SD of its 5-year historical mean. As such, we upgrade Hartalega to Neutral.

  • Better times for glove makers. Following the oversupply condition previously, some glove makers have pushed back their expansion plans from CY19 to CY20 to rebalance the demand and supply. By deferring their expansion plan, it has resulted in less intense competition among the glove producers. Glove makers are also seeing a surge in demand for nitrile gloves starting from the month of June. We reckon the increase in demand was partially due to the US-China trade war, as some of the Chinese manufacturers are diverting their orders to other countries, in order to dodge additional tariffs imposed by the US government. In view of the increase in demand, we believe that ASP can be revised upwards easily to accommodate and fully pass on the increase in gas cost and higher nitrile prices. Nitrile prices have been on the rise as suppliers are cutting back on production, in view of the sluggish automotive sector globally.
  • Pickup in utilization rate. Note that previously in 1QFY20, Hartalega’s average utilization rate has fallen to 76% due to a conscious effort to scale down production as the low prices for nitrile gloves were unfavorable to manufacturers. The current uptick in demand for nitrile gloves has lifted the average utilization rate to 85%, with the lines in NGC running at above 90% utilization rate. We expect the high utilization rate to sustain, following the surge in demand experienced by the glove makers.
  • Expansion updates. Plant 5 of NGC has been fully commissioned in 1HCY19. Plant 6’s (+4.7bn pcs pa) construction works are underway, targeting to commission its first line in 1QCY20. As for Plant 7 (+3.4bn pcs pa), the first line is expected to commission by 2HCY20. In light of the recent foreign workers shortage issue faced by many manufacturers, we find comfort that Hartalega has already secured approvals from relevant authorities and was allocated with the required amount of foreign workers to run Plant 6 once the operations begin. On a side note, Hartalega has also set aside capex of RM630m to grow its manufacturing facility for CY20-22F. An additional RM115m is also allocated for investment in IT and automation solutions.
  • Expecting slight decline in full-year FY20F results. While we expect to see gradual QoQ improvement in the Group’s performance from this point onwards due to higher utilization rate on existing capacity, we believe that on a full-year YoY basis, the performance will be weaker due to high base effect.

Source: PublicInvest Research - 19 Sept 2019

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