Investment Highlights

• We maintain our UNDERWEIGHT call on Hartalega Holdings (Hartalega) with a higher fair value of RM6.09 (vs. RM5.38/share previously). Our valuation is based on a P/E of 38x (35x previously) FY21F EPS.

• We like Hartalega for its long-term prospects underpinned by capacity expansion, product innovation and superior operating efficiencies. However, we believe its PE is demanding at 40.4x FY21 EPS compared to Kossan’s PE of 22.5x FY20 EPS.

• We have raised our P/E multiple for Hartalega to 38x (+1SD) on FY21F EPS. We increase our FY21F earnings by 2.4% but reduce our FY22F earnings forecast slightly by 0.4%. We think that the Covid-19 pandemic would be contained by 1HFY21 and subsequently, demand for gloves would taper off.

• The World Health Organization (WHO) has declared the coronavirus, Covid-19, a pandemic, urging governments to step up containment efforts as the number of worldwide cases topped 120K and deaths exceeded 4.3K.

• Recall that during the previous pandemic outbreak, Hartalega’s earnings and share price shot up. At the start of the 2009–2010 H1N1 pandemic, Hartalega’s share price was RM0.28 and it jumped to RM0.68 by the end, about 15 months later, as shown in Exhibit 1.

• Previously during the H1N1 pandemic, Hartalega’s revenue and net profit rose 29.0% and 69.5% respectively in FY10 as demand soared. This resulted in a 5.9ppt improvement in net margins (25.0% in FY10).

• We believe that orders for gloves during the outbreak were high as customers stock up more than usual as a preemptive measure. However, the sharp improvement then was also attributed to Hartalega’s dominance in the nitrile glove market as it benefitted from the pivotal shift in demand from natural gloves to nitrile gloves.

• Hartalega’s 1-year average trading P/E was 7.9x before the WHO declared H1N1 as a pandemic. Its P/E peaked at 16.0x (+4.1SDs) in March 2010.

• We expect Hartalega’s 4QFY20F will be strong on the back of contribution from its newly commissioned Plant 6 as well as benefit from an expected increase in demand for gloves arising from the Covid-19 pandemic.

• We forecast Hartalega’s FY21F net earnings to grow by 16.2% YoY and net margin to improve to 15.8% from 14.7%.

• Assuming that the Covid-19 pandemic is contained in 1HFY21F, we anticipate a drop in sales growth in 2HFY21F onwards from an excess supply situation in the customer’s inventory. We forecast FY22F net margins to contract slightly by 0.5ppt to 15.3% and net earnings growth of 4.5%.

Source: AmInvest Research - 13 Mar 2020