Investment Highlights

• We maintain HOLD recommendation on Hartalega with a lower fair value of RM13.30 (from RM19.38) based on its 5-year average PER of 38x over CY22 EPS. We raise our FY21 net profit forecasts by 18% while cutting FY22–23 numbers by 24% and 30% respectively. We also increase our FY21 average selling price (ASP) assumption to US$40/1,000 pieces (from US$36) while lowering FY22–23 ASP to US$33/1,000 pcs and US$32/1,000 pcs (from US$34 for both).
• Hartalega has initiated a precautionary mass testing (PMT) in phases 7–10 Dec covering all employees as well as canteen & grocery shop operators, totalling to over 8,772 persons within Hartalega premises in all locations (NGC Sepang, Bestari Jaya, Petaling Jaya & Sri Damansara office). Of these, 35 workers (20 from Bestari Jaya, 15 from NGC) were Covid-19 positive.
• Disinfection has been carried out. The primary contacts identified are undergoing a 14-day quarantinpe and will undergo subsequent testing as per standard operating procedures (SOPs) before they are permitted to return to work. Hartalega has closed 8 production lines for a month. The impact on the production output is less than 0.5%.
• Hartalega’s implementation of stringent measures – social distancing among workers, good hygiene, readiness of a quarantine centre and working/accommodation area segregation – has successfully curbed the spread of the virus, recording a significantly low positive rate of 0.4%.
• The company noted that demand will continue to outstrip supply for the next 12 months with a structural step-up where glove demand is expected to grow 12–15% per annum. Moreover, management guided ASP to increase by about 50% in the coming quarter. We raise our FY21 net profit forecasts by 18% as we increase our ASP assumption to US$40/1,000 pcs (from US$36). Nonetheless, we expect ASP to decline in CY22 as there is no longer a rush for gloves with the availability of vaccine. We are cutting our FY22–23 earnings’ estimates by 24% and 30% respectively by lowering ASP assumptions to US$33/1,000 pcs and US$32/1,000 pcs (from US$34 for both).
• 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 during the period. However, we believe that the stock is fully valued with a PER of more than 35x FY23F EPS. Maintain HOLD.

Source: AmInvest Research - 16 Dec 2020