Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Wed, 5 Aug 2020, 11:10 AM


Hartalega Holdings- Quantum Leap in Earnings

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Taking the cue from the other glove players’ quarterly earnings announcements over the past month, we are raising our assumptions for HARTA. Specifically, the industry trend of rising ASPs is expected to substantially boost its bottom-line. Our analysis further suggests that ASP is expected to stay elevated over the next few quarters. Hence, we raised our FY21E/FY22E net profit by 47%/53%. TP is raised from RM13.90 to RM18.16 based on 43x CY21E EPS. Reiterate OP.

Expect quantum leap in earnings. Strong QoQ earnings results of glove players over the past month suggest that demand will be strong over the next few quarters with industry ASP higher on a weekly and monthly basis. Anecdotal evidence suggests that rubber glove players’ explosive QoQ earnings growth is expected to sustain over the next few quarters. Judging by the results of other players over the past two weeks only, we are raising our assumptions for HARTA. Specifically, the industry trend of rising weekly and monthly ASPs between 5% to +15% is expected to boost its bottom-line.

Our analysis suggests shortage in supply. We have done an analysis to dispel any concerns of gloves oversupply. In anticipation of higher demand due to the pandemic, stock piling and entrant of new users, players are raising capacities to meet the surging demand. Our analysis (see table overleaf) suggests that acute supply and supernormal demand could persist over the next two years. Interestingly, players are getting orders from new users including airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks overwhelming. But viewed against the incremental new pandemic driven demand in addition to the annual base level demand growth, the additional capacity is not a concern. In fact, the estimated new yearly capacity may not actually start as scheduled and hence the supply shortage will continue to be acute in 2021. Typically, to cater for normal demand, glove makers essentially need to build just one plant per year. However, from channel checks, to cater for this current pandemic driven demand, two to three plants are required for each glove maker (on average) annually in order to meet the supernormal demand, which takes between 12 to 24 months to complete. Hence, we conclude that ASP tightness will continue going into 2021. We highlight that a player in China ramping up capacity by 30b pieces over 2-3 years could take longer than expected as it typically takes 8 to 10 years to build such a capacity.

China and low user per capita countries are potential high growth markets. We expect gloves consumption per capita in China to surge sharply following the COVID-19 experience. For illustration purposes, assuming a population of 1.4b and conservative 30 gloves per capita (from currently 9 – please refer to chart overleaf - compared to developed western countries which averaged 200 pieces per capita), this implies a massive 42b piece (from currently 2.8bn pieces) of rubber gloves consumption in China annually. Hence, any new supply from the Chinese players could be absorbed domestically.

Raised FY21E/FY22E net profit by 47%/53% after: (i) imputing higher ASP from USD29/1,000 pieces to USD30.50/1,000 pieces for each year, and (ii) assuming higher EBITDA margin of 35% compared to 26.5% previously. We raised our FY22E utilisation to 100% from 97%.

Reiterate OP. TP is raised from RM13.90 to RM18.16 based on 43x CY21E revised EPS (previously 50x) (at slightly below +2.0SD above 5- year historical forward mean). We lowered our PER rating as we believe valuations are pegged to supernormal earnings; hence, upside to peak earnings should have been factored in. We like Hartalega for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment.

Risks to our call: lower-than-expected ASPs and volume sales

Source: Kenanga Research - 1 Jul 2020

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