Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Hartalega Holdings (Hartalega) with an unchanged FV of RM6.09 based on 38x CY21F EPS (rolled over from FY21F EPS).

• We have tweaked our FY20F, FY21F and FY22F earnings estimates downwards by 0.6%, 1.2% and 1.5% respectively to account for delayed expansion plans during movement restriction order (MCO) and higher finance costs resulting from a land acquisition announced yesterday. Contribution from the new expansion plan is only expected to come in FY23F onwards.

• 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 41.4x FY21 EPS.

• Hartalega announced on Bursa that the group is purchasing a 95.1-acre land in the district of Kuala Langat from Bonus Essential Sdn Bhd (BESB) for a total cash consideration of RM263.1mil to be funded by internally generated funds and existing credit facilities.

• The acquisition is in line with its growth plan following the expected completion of the existing NGC expansions in Sepang in 2021.

• The site is around 20km away from the existing NGC Sepang site and is expected to house 7 plants with a total of 82 lines. This should bring in roughly 32bil pieces per annum of capacity by 2029 (around 4bil per year).

• The acquisition is expected to be completed in 2H2022 and its first line is expected to be commissioned in the same year. Hartalega expects to begin construction in 2021 concurrently with the main infrastructure works to be completed by BESB (i.e. earth filling work, access road, two bridges and other utilities).

• We believe the price of around RM63.5 psf is fair (provided that there are no further conversion costs borne by Hartalega) considering that BESB will build the main infrastructures and the land size is customized. Quick checks showed that industrial land in the region is valued at around RM50–60psf.

• Apart from that, the government has extended the MCO until 14 April 2020 during which construction of its Plant 6 is halted. We now assume a delay in contributions from Plant 6’s expansion by a month but we still expect all 12 lines to be fully commissioned by end-2020.

• We expect net gearing to increase to 10% in FY22F from 8% in FY20F resulting from the acquisition.

Source: AmInvest Research - 26 Mar 2020