Investment Highlights

• We maintain HOLD on Hartalega with a higher fair value of RM13.56 (from RM12.25) based on a PER of 30x over CY22F EPS. We raise our FY21–FY22 net profit forecasts by 37% and 103% respectively on the back of higher average selling price (ASP). We also increase our ASP assumption to US$47/1,000 pieces (from US$36) for FY21 and US$45/1,000 pieces (from US$34) for FY22. We make no changes to our FY23 numbers.
   
• Hartalega’s 9MFY21 core net profit of RM1,766.3mil (vs. RM319.2mil in 1HFY20) accounted for 85% of our and 70% of consensus’ full-year earnings estimates. It is above our forecasts, and we deem this to be above consensus expectations too as earnings are expected to improve in 4Q on the back of rising demand and ASP.
   
• 9MFY21 revenue expanded by 104.8% YoY while net profit surged 453.4% YoY driven by improved demand due to the Covid-19 pandemic. 3QFY21 sales volume grew by 12.2% YoY (flattish QoQ) to 9.5bil pieces while ASP rose by 142% YoY (+61% QoQ) to RM224/1,000 pieces (about US$54.70).
   
• The company’s 9MFY21 EBIT soared 442.7% YoY to RM2,306.7mil. EBIT margin expanded to 52.5% from 19.8% for the same period on the back of higher ASP and lower energy cost. Hartalega’s utilisation rate dropped to 95% in 3QFY21 from 98% in 2QFY21.
   
• To date, all 12 production lines in Plant 6 of its NGC facility are already fully commissioned. Meanwhile, 4 of the 10 lines in Plant 7 have been commissioned. In total, plant 7 has a total production capacity of 2.7bil pieces per annum. 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. Although we hold the view that demand for gloves will remain stable post-Covid-19, we expect ASP to decline as there is no longer a rush for gloves compared to what happened at the beginning of the pandemic. We believe that the stock is fully valued with a PER of 29x CY22F and 40x CY23F. Maintain HOLD.

Source: AmInvest Research - 26 Jan 2021