Hartalega Holdings Berhad - Well On Track

Date: 27/04/2018

Source  :  PUBLIC BANK
Stock  :  HARTA       Price Target  :  5.10      |      Price Call  :  HOLD
        Last Price  :  5.30      |      Upside/Downside  :  -0.20 (3.77%)

We met with Hartalega recently. The Group’s NGC expansion plan is on track with total annual production capacity expected to reach 44.6bn pcs p.a. by 2021 (refer to Table 1). Hartalega plans to launch its antimicrobial gloves (AMG) in Europe end of next month and is in the process of securing US FDA approval to enter the US market. We believe a successful offtake for AMG would help Hartalega to preserve its profit margin and expand market share in the medium term. We maintained our earnings estimates for FY18- 19F, but tweaked our FY20F earnings by c.2% as we made some minor adjustments on the expansion to include Plant 7. The proposed bonus issue was completed on 28th March; our revised post-bonus issue TP is RM5.10 (from RM5.00 previously). While we acknowledge Hartalega’s strength in executing its expansion plan, we noted that the share is currently trading at 38x PE to FY19F EPS (above 1.5SD to 5-year average PE of 37x). Hence, we see limited upside from current level. We reiterate our Neutral call.

  • NGC Plant 4 has fully commissioned all 12 lines since January this year. The expansion is on track with NGC Plant 5 and Plant 6 expected to start commissioning first line in July 2018 and 1H 2019 respectively. Hartalega’s orders are fully booked up to June 2018. 4QFY18 result is slated to be released on 15th May 2018.
  • New plant – NGC Plant 7 will only have 10 production lines with an annual capacity of 2.6bn pcs p.a. This is relatively smaller as compared to Plant 1-6 which each plant has 12 production lines and annual capacity of 4.7bn pcs p.a. Plant 7 will be running at a slow rate of 30,000 pcs of gloves/hour per line to cater for changes as the plant will mainly tailor to small orders and focus more on specialty gloves - including but not limited to surgical glove, cleanroom glove, industrial glove and custom-made glove. The main purpose of building Plant 7 is to phase out one of the old plants in Bestari Jaya which produces specialty gloves and is currently running at an average speed of only 15,000 pcs of gloves/hour per line. Plant 7 is expected to begin commissioning its first line by end-2019. The new plant which has higher production efficiencies and automation are likely to drive margins expansion for the Group’s specialty gloves upon full commissioning.
  • To launch AMG in Europe end of next month. Hartalega had in November last year announced its plan to launch the world’s first non leaching antimicrobial nitrile examination glove (AMG) to reduce hospital-acquired infections. Hartalega plans to first launch its AMG in Europe on 31st May this year and is working on securing US Federal Drug Administration (FDA) approval to enter the US market. In term of pricing, Hartalega will price it competitively to encourage better take-up rate to make it a new norm and new standard of protection in the industry. Leveraging on product innovation, Hartelega is set to protect its margins by creating customer stickiness with its new product.
  • Competitive advantage. Unigloves Ltd, a UK-based single use glove company, had introduced a similar function of nitrile antimicrobial glove - Fortified in Europe January this year. Though losing the first-mover advantage in the region, we note that Hartalega’s AMG still has its competitive advantage over its peer. Hartalega’s AMG can kill bacteria with up to 99.999% (5-log) effectiveness within 5 minutes of contact, while Unigloves’ Fortified, which incorporates BioCote’s silver ion technology, is only able to destroy 90% of bacteria within 15 minutes and 99.5% within 2 hours. We understand that the time required to kill bacteria is crucial as the average time span of usage for medical gloves donned by doctors is about 7 minutes according to industry sources. From this point, Hartalega’s AMG is more practical and provides higher level of protection than its peer’s.
  • Potential FBMKLCI inclusion most likely a non-event. We highlight the possibility of Hartalega being included into the FBMKLCI Index as a component stock in the upcoming semi-annual review in May. Nevertheless, we think that the inclusion would not have a significant impact on its share price performance and is most likely a non-event to Hartalega. We note that the stock is already well-invested among the institutional funds with high institutional shareholdings at c.32-34% over the last six months. Additionally, the Kuan family collectively holds 55% of Hartalega. Although index tracker funds would adjust their portfolios and buy the new index component stock, we note that the weightage is relatively small as Hartalega is only ranked 25th currently amongst the 30 FBMKLCI component stocks by market cap.

Source: PublicInvest Research - 27 Apr 2018

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