Investment Highlights

• We maintain our HOLD recommendation on Hartalega Holdings (Hartalega) with an unchanged FV of RM4.96/share based on 33x FY21F P/E. This is Hartalega’s historical 3-year average forward PE.

• Hartalega’s 1HFY20 core net profit of RM196.5mil (-21.8% YoY) came in at only 42.3% and 40.9% of our and street’s estimates respectively. However, we consider the results within expectations as we anticipate improving average selling price (ASP) in the subsequent quarters with excess supply in the market gradually absorbed by growing demand.

• Hartalega’s 2QFY20 revenue rose 10.8% QoQ to RM709.4mil (1QFY20: RM640.1mil) due to a 13.8% recovery in sales volume.

• Capacity utilization rate increased to 85% in 2QFY20 from 76% in 1QFY20. Revenue contribution from the group’s main export markets increased QoQ (US +10.6%; Latin America +6.0%; Europe +18.5%) in 2QFY20.

• 2QFY20 EBITDA climbed 10.6% QoQ to RM171.5mil (RM155.1mil in 1QFY20). EBITDA margin eased by 0.1ppts QoQ to 24.2% in 2QFY20 due to lower selling prices.

• ASP declined to US$22.70 per thousand pieces in 2QFY20 from US$23.40 in 1QFY20.

• Comparing 1HFY20 with 1HFY19, Hartalega’s revenue fell 5.0% to RM1,349.5mil (from RM1,420.6mil in 1HFY19) as its ASP dropped 7.8% YoY to US$23.05 per thousand pieces (US$24.99 in 1HFY19) and sales volume edged down by 0.3%.

• The group’s 1HFY20 EBITDA dropped 4.6% YoY to RM326.6mil (RM342.4mil in 1HFY19). However, EBITDA margin improved marginally by 0.1ppts to 24.2%.

• In spite of a lower ASP, slightly reduced sales volume and higher electricity and gas costs in 1HFY20, Hartalega was able to sustain its EBITDA margin of 24%. We believe this was due to the group’s efforts in improving efficiencies and optimizing costs.

• The delay in the expansion of circa 5.8bil pieces by glove players is expected to improve the industry’s supply situation. Also, we believe that Hartalega would benefit from the US-China trade war as the US had imposed a 15% tariff on China’s medical gloves (around 54% of Hartalega’s exports is to North America). We expect the group’s top line to continue growing in the subsequent

• Hartalega’s has a capacity of 36.6bil pieces per annum currently. Hartalega has commissioned all 12 lines in Plant 5 and is expected to commission Plant 6 (+4.7bil pcs) by 1QCY20 and Plant 7 (+3.4bil pcs) in 2HCY20. We believe that the company’s operational efficiencies would improve with the commissioning of new lines and decommissioning of older lines. Hartalega is currently working to secure the US Food and Drug Administration’s approval to sell its antimicrobial gloves (AMG) in the US. We think that the approval will be obtained by 2HCY20.

• We continue to like Hartalega for its long-term prospects underpinned by capacity expansion, product innovation and superior operating efficiencies. Having said that, we are mindful of the soft patch in the industry over the immediate term due to the onslaught of new capacity, resulting in heightened competition that hurts selling prices and hence margins. It will take time for the new capacity to be fully absorbed by growing demand.

Source: AmInvest Research - 6 Nov 2019