Investment Highlights

• We maintain our HOLD recommendation on Hartalega Holdings (Hartalega) with a higher fair value (FV) of RM18.58 (previously RM16.24). Our valuation is based on 45x CY21F EPS.
• Hartalega’s 1QFY21 core net profit of RM224.8mil (vs. RM96.1mil in 1QFY20) accounted for 17.4% of our and 17.0% of consensus’ full-year earnings estimates. We deem this to be in line as earnings are expected to improve in the subsequent quarters on the back of rising demand and average selling price (ASP).
• We take this opportunity to raise our ASP assumptions following the group’s guidance. ASP is expected to increase 30% in 2QFY21 and at least another 30% QoQ in 3QFY21.
• We have raised our ASP assumptions by 5.3% in FY21F to US$34, 9.0% to US$30 for FY22F and 3.3% to US$27 for FY23F. As such, our earnings forecasts for Hartalega are now higher by 10.6% for FY21F, 31.9% for FY22F and 18.4% for FY23F.
• Hartalega’s 1QFY21 revenue was RM920.1mil (+43.7% YoY; +18.3% QoQ). This was driven by improved demand on the Covid-19 pandemic. Sales volume grew by 38.5% YoY (+7.4% QoQ) while ASP rose by 4.1% YoY (+8.1% QoQ) to RM101 (roughly US$23.50).
• The group’s EBITDA surged 98.3% YoY to RM307.5mil in 1QFY21. EBITDA margin expanded 9.2ppts to 33.4% in 1QFY21 on the back of higher ASP, lower raw material and energy costs and other cost control initiatives. Hartalega achieved 100% utilisation rate in 1QFY21 with a total of 9.1bil gloves produced.
• At the start of the pandemic, the group had a subpar price increase due to the nature of its customer profile where the bulk of sales goes to major customers.
•  However, Hartalega is now expecting ASP to soar as the group takes in more spot orders. Around 5–7% of total capacity have been allocated for spot orders, which have now been taken up until March 2021.
• The group expects demand to continue to outstrip supply for the next few years with a structural step-up in demand where glove demand is expected to grow 12–15% per annum.
• Hartalega highlighted that the allocation for nitrile rubber from its suppliers has not reduced, and the group is confident that it will be able to procure ample material for its production lines, including the upcoming lines in Plant 6 and Plant 7. The group also noted that its lines are interchangeable and can produce either nitrile-based rubber gloves or natural rubber gloves.
• Hartalega is expected to commence the first line of its NGC 2.0 expansion plan in 1QCY20. The group expects an additional capacity of 3.4bil pieces of gloves in FY22F and another 4.7bil pieces in FY23F.
• Hartalega has taken preemptive measures with regards to its recruitment policy, and is working on a remediation plan for the recruitment costs incurred by its workers. This is pursuant to the zero-recruitment policy, which commenced in April 2019. The group expects to spend roughly RM45mil for this exercise.
• 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 demand for gloves outstrips supply. However, we believe that the stock is fully valued with a P/E of 51.9x FY22F EPS.

Source: AmInvest Research - 5 Aug 2020