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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 14 Aug 2020, 10:24 AM

 

Hartalega Holdings - The Great ASP Chase

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Signs of higher ASP in the industry have prompted us to raise our ASP assumptions again. Players have raised ASPs again indicating continuing supernormal demand and acute shortages. Standing testimony to the increasingly strong prospects of the sector, analysts surveyed by Blomberg Consensus have over the last 5 months consistently upgraded the earnings forecasts for HARTA. Hence, we raised our FY21E/FY22E net profit by 25%/23%. TP is raised from RM18.16 to RM22.30 based on unchanged 43x CY21E EPS. Reiterate OP.

Industry ASP for Aug has risen again. We highlight that industry ASP has risen for Aug delivery coupled with the strong Q-o-Q earnings results of glove players over the past month suggest that demand will continue to be strong over the next few quarters. Anecdotal evidence suggests that rubber glove players’ explosive Q-o-Q 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.

Upward share price movement is indicating massive earnings growth over the next two quarters. Based on historical observation between share prices and earnings trend over the past few years (see overleaf), share price of HARTA had historically reacted ahead by two quarters of good or weak results. Hence, we believe the current upward movement in its share prices is indicating very strong earnings ahead for HARTA.

Consensus upgraded earnings by 50%-80% over the past 5 months. Standing testimony to the increasingly strong prospects of the sector, analysts surveyed by Blomberg Consensus have over the last 5 months have consistently upgraded their earnings forecasts for HARTA which we believe may not be enough judging by the runaway ASP which will be higher M-o-M at least till end Dec 2020.

Nitrile gloves’ market share to gain further momentum with potential 30% growth. Based on our analysis, we expect nitrile gloves to continue growing and expropriate market share from latex. The growth in nitrile segment is evident. For illustration purposes, going forward, assuming nitrile:latex ratio of 80:20 (currently at 67:37) and based on estimated global demand of 324b pieces in 2020 (forecast for 2019 is 300b pieces and assuming a 8% growth rate in 2020), this implies nitrile growth rate of 20% or an additional 42b pieces from the switch to nitrile.

Raised FY21E/FY22E net profit by 25%/23% after: (i) imputing higher ASP from USD30.50/1,000 pieces to USD34/1,000 pieces for each year, and (ii) assuming higher EBITDA margin of 39% compared to 38% previously.

Reiterate OP. TP is raised from RM18.16 to RM22.30 based on unchanged 43x CY21E revised EPS (at slightly below +2.0SD above 5- year historical forward mean). 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 - 13 Jul 2020

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