Investment Highlights

• We maintain our HOLD call on Hartalega with a higher fair value of RM9.90/share (previously RM9.86/share), reflecting a 3% premium for an ESG rating of 4 stars (Exhibit 8). Our valuation is based on an unchanged PER of 22x CY23F (rolled over from CY22F).

• We have increased our FY22F and FY23F earnings estimates by 77% and 33% respectively as we raise our blended ASP to US$62/1,000 pcs and US$32/1,000 pcs respectively (Exhibit 2) from US$42/1,000pcs and US$31/1,000 pcs.

• We believe that a resurgence in global Covid-19 cases, pent-up buyer demand and supply shortage in the US will result in Hartalega maintaining its strong ASP.

• Here are some highlights of the results briefing:

Financial results:

• Hartalega’s FY21 net profit came in at RM2.9bil, which is within expectations. It accounted for 102% and 95% of our and consensus expectations respectively.

• The group posted 4QFY21 earnings of RM1.1bil (+12% QoQ) on the back of a sharp increase in blended ASP. This mitigated poor production volume, rising raw material prices and shipping disruptions.

• Its 4QFY21 revenue came in at RM2.3bil (+8% QoQ) as blended ASP jumped to US$82.71 from US$54.55. A poor quarterly utilization rate of 64% as a result of factory outbreaks contributed to weaker sales volume.

• Elevated nitrile butadiene rubber (NBR) prices have increased COG per glove by 25% QoQ and 54% YoY in 4QFY21. However, Hartalega is confident that NBR prices will normalize as the supply shortage begins to wear out within the next few months.

• The group has declared a third interim dividend of 17.70 sen, with an entitlement date on 24 May. This brings total DPS for FY21 to 33.3 sen.

Blended ASP forecasts

• We believe blended ASP will remain strong in 1HFY22 for a number of reasons:

1. Resurgence in global cases. We are less certain of a stable global recovery by end-2021F. Instead, a scenario where some countries have successful vaccination efforts, while others crumble from government mismanagement seems increasingly plausible.

2. Pent-up demand. Potential buyers have opted for a wait-and-see-approach in hopes of making their purchases as glove ASP begin to fall. Hartalega believes that inventory levels will likely run out before this happens.

3. A supply shortage in USA. With Top Glove being sanctioned by the US Customs and Border Protection, US customers have approached Hartalega for their needs. Gloves sold to US customers tend to have a premium, which we believe will be in the 5–10% range.

4. Hartalega’s prudent ASP increases. Market glove prices are falling roughly 3–5% MoM currently. This is due to the group’s peers having products in the US$110–120 range within the last few quarters before being hit by the effects of lower glove urgency.

• Our forecasted prices and production metrics are shown in Exhibit 2.

Utilization rates

• Utilization rates fell to 64% in 4QFY21 as a result of factory outbreaks. In the past three quarters, utilization rates were more than 95%. All in, this gives a utilization average rate of 89% for FY21.

• We believe FY22F will enjoy a similar utilization rate for a number of reasons:

1. A resurgence of local Covid cases. We expect an increased number of factory and dorm outbreaks in the manufacturing industry in general.

2. Manpower shortages, coupled with rising production capacity. Hartalega has already seen an outflow of foreign workers, with 282 workers repatriated within the span of the pandemic.

Capacity expansion

• Regarding NGC 1.5, the first line is targeted to commence towards 4QCY21.

• Hartalega’s current capacity is 43bil gloves per annum. This value is expected to be maintained until end-CY2021.

• The group is currently deliberating on whether to begin production on NGC2.0 or to delay it in favour of its Kedah venture, NGFZ (Exhibit 4). We do not discount the possibility of NGC 2.0 being cancelled.

ESG efforts

• Hartalega has made considerable effort towards combating forced labour (Exhibit 5).

• We assign a 4-star rating to Hartalega’s commendable effort towards improving worker welfare and standard of living. It’s worth noting that the group already took this seriously before the industry was thrust into the spotlight.

• As a testament to their efforts, Labour Department director-general Asri Ab. Rahman cited Hartalega as an “industry champion” for other companies to emulate.

Source: AmInvest Research - 5 May 2021