Investment Highlights

• We maintain HOLD on Hartalega with an unchanged fair value of RM13.56 based on a PER of 30x over CY22F EPS. We make no changes to our FY21–FY23 net profit forecasts respectively. Our ASP assumptions are unchanged at US$47/1,000 pieces for FY21; US$45/1,000 pieces for FY22; and US$32/1,000 pieces for FY23.

• Hartalega hosted an analyst briefing to shed more light on its recently announced 9MFY21 results. Here are the key takeaways:

1. All 12 production lines in Plant 6 of its NGC facility are already fully commissioned. Plant 7 has commissioned 4 lines in November 2020 and 2 more additional lines will be ready by 4QFY21 while the remaining 4 surgical lines will be commissioned in the coming quarters. With the progressive commissioning of Plant 7, Hartalega’s annual installed capacity is expected to increase from the current 41bil p.a. to 44bil pieces p.a. by FY2022.
    
2. Hartalega is planning to double its production capacity by 2027 by building new plants on NCG1.5 and NGC2.0 on 2 pieces of land in Sepang and Banting measuring 60 acres in total. With the expansion plan in place, Hartalega’s production capacity will be raised further from 44bil pieces p.a. to 95.1bil pieces p.a. in 2027.
    
3. In the area of environmental, social and governance (ESG), Hartalega obtained the MSCI ESG rating of “AA” in the healthcare equipment & supplies industry in December 2020. The MSCI ESG rating measures a company's resilience to long-term, industry material ESG risks. Hartalega has spent RM95mil on its NGC accommodation and is also spending RM2mil per month on Covid-19 prevention measures.

• To recap, Hartalega recorded a 9MFY21 core net profit of RM1,766.3mil (vs. RM319.2mil in 1HFY20) on the back of higher sales volume, stronger ASP and lower energy cost.

• 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 28x CY22F and 38x CY23F. Maintain HOLD.

Source: AmInvest Research - 27 Jan 2021