Investment Highlights

• We maintain HOLD on Hartalega with a higher fair value of RM19.38 (from RM18.74) based on its 5-year average PER of 38x over CY21F EPS. We raise our FY21–FY23 net profit forecasts by 21%, 30% and 52% respectively on the back of higher average selling price (ASP). We also increase our ASP assumption to US$36/1,000 pieces (from US$34) for FY21–FY22 and US$34/1,000 pieces (from US$27) for FY23.
• Hartalega’s 1HFY21 core net profit of RM764.7mil (vs. RM197.9mil in 1HFY20) accounted for 53% of our and 39% of consensus’ full-year earnings estimates. We deem this to be above our expectation as earnings are expected to improve in the subsequent quarters on the back of rising demand and ASP.
• 1HFY21 revenue expanded by 67.9% YoY while net profit surged 286.3% YoY driven by improved demand on the Covid-19 pandemic. 2QFY21 sales volume grew by 26.6% YoY (+4.3% QoQ) to 9.5bil pieces while ASP rose by 50% YoY (+40.1% QoQ) to RM142/1,000 pieces (about US$34.10).
• The company’s 1HFY21 EBIT soared 263.7% YoY to RM956mil in 1HFY21. EBIT margin expanded to 42.3% from 19.5% for the same period on the back of higher ASP, lower raw material and energy costs and other cost control initiatives. Hartalega’s utilisation rate dropped to 98% in 2QFY21 from 100% in 1QFY21. Around 7%–10% of total capacity have been allocated for spot orders, which have now been taken up until July 2021.
• Management noted that demand will 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. To date, all 12 production lines in Plant 6 of NGC facility were fully commissioned. Meanwhile Plant 7, which caters to specialty products, is expected to begin commissioning in the 4QCY20 with an annual installed capacity of 2.7bil pieces. With the progressive commissioning of Plant 7, Hartalega’s annual installed capacity is expected to increase from the current 41bil to 44bil pieces by FY2022.
• We continue to like Hartalega for its long-term prospects, underpinned by capacity expansion, product innovation and superior operating efficiencies. We reckon 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 PER of 35.8x FY22F and 38.6x FY23F EPS. Maintain HOLD.

Source: AmInvest Research - 28 Oct 2020