Investment Highlights

• We maintain our UNDERWEIGHT recommendation on Hartalega Holdings (Hartalega) despite a higher FV of RM7.37/share based on 38x CY21F P/E (rolled over from FY21F P/E previously). We have raised our earnings estimates by 27% to reflect a higher ASP and sales volume estimate due to the persistence of the Covid-19 pandemic. We introduce our FY23F earnings forecast of RM666mil.

• Hartalega’s FY20 core net profit of RM433mil (-6% YoY) was slightly below our and street’s full-year earnings estimates, coming in at 93% and 95% of ours and street’s estimates respectively. The variance was largely due to a fair value loss on financial derivatives amounting to RM37mil in FY20 (RM42mil in 4QFY20).

• Hartalega’s 4QFY20 revenue rose 14% YoY (down 2.3% QoQ) to RM778mil on the back of an 18% YoY increase in sales volume (+20% nitrile gloves; -19% latex gloves). Capacity utilisation rate remained high at 96% in 4QFY20.

• 4QFY20 EBITDA grew 19% YoY to RM172mil (RM144mil in 4QFY19). EBITDA margin grew 1.0ppt to 22% (EBITDA margin would have expanded up 6.1ppt to 27% if the fair value loss on derivatives was taken out). This was on the back of cheaper raw material prices, energy costs and cost control initiatives.

• ASP was lower by 6% in 4QFY20, at around US$21.94 per thousand pieces compared to US$23.41 in 4QFY19 (in MYR terms, it fell to RM92 from RM96). This was in tandem with lower raw material costs.

• Comparing FY20 with FY19, Hartalega’s revenue rose 3% to RM2,924mil (from RM2,828mil). This was on the back of a 9% growth in sales volume (+11% nitrile gloves; -34% latex gloves) while ASP dropped 6% YoY to US$22.62 (from US$24.13). The MYR weakened against the USD by 1% which narrowed the ASP decline in MYR terms to RM94 from RM99 in FY19 (-5%).

• The group’s FY20 EBITDA margin remained flattish at 24% (25% if FV loss on derivatives was stripped out). This was in spite of lower selling prices, higher price of latex, packaging and overhead. The group enjoyed lower nitrile prices and energy costs.

• Hartalega has an installed capacity of 38.1bil pieces per annum currently. It has commissioned 4 lines out of 12 in its Plant 6 so far in 2020. Construction of Plant 7 is underway and is expected to expand its capacity by 2.4bil gloves annually, focusing more on small orders.
   
• Demand for gloves has picked up strongly as the Covid-19 pandemic persists. Hence we expect Hartalega’s gloves’ ASP and sales volume to improve in the upcoming quarters. We estimate that the group’s net margins will expand by more than 3ppt to around 18–19% before contracting in FY22F as the pandemic subsides and demand tapers.
   
• We continue to like Hartalega for its long-term prospects underpinned by capacity expansion, product innovation and superior operating efficiencies. We believe the group will benefit from the Covid-19 pandemic as we expect the industry-wide capacity expansion will be met with increased glove demand. However, we believe that the demand for gloves will immediately taper after the outbreak has been contained

Source: AmInvest Research - 19 May 2020