Investment Highlights

• We maintain our HOLD call on Hartalega with a lower fair value of RM8.55/share (previously RM9.90/share), reflecting a 3% premium for an ESG rating of 4 stars. Our valuation is based on a reduced PER of 19x FY23F EPS (formerly 22x).
   
• We use a lower PE ratio as global demand for gloves is expected to ease on successful vaccination efforts. Also, investor sentiment on glove stocks is negative and there is a lack of re-rating short term catalysts. We believe prices will be more reflective of PE values closer to pre-pandemic averages after average selling prices (ASP) see some form of stabilization.
   
• Our earnings forecasts are unchanged. We maintain our FY22F projections. Our assumptions of a blended ASP of US$62/1,000 pcs and an 89% utilisation rate are in line with current numbers.
   
• 1QFY21 ASP was roughly ~US$90/1,000 pcs, with 2QFY21 prices forecasted to fall by 24% QoQ. US glove prices are trading at a premium of up to US$10/1,000 pcs.Hartalega is expecting a slowdown in the decline of ASP after customers adjust their orders in the coming 2–3 months to manage existing inventory costs.
   
• Factory utilisation rate was 70% during MCO 3.0.
   
• During yesterday’s briefing, Hartalega elaborated on its social compliance efforts. A full list of these can be found in Exhibit 1. Here are some notable highlights:

1. Hartalega is committed towards the remediation of recruitment fees of up to RM40mil thus far. It has so far completed its reimbursement of non-zero cost programme workers, with the remainder of its current workers to be reimbursed by July 2021. It will take a further six months to reimburse former workers.
    
2. We understand that on numerous occasions, activists have taken workers’ words without any verification. The group will be conducting another round of interview for zero-recruitment cost programme workers who claimed they have paid. Worth noting is that Hartalega began its zero-cost programme and remediation efforts well before recent Top Glove controversies came to light.
    
3. Also, Hartalega highlighted more demanding industry requirements following Top Glove’s controversy, citing a lack of uniform industry standards as an issue. It stresses the need for the recruitment process being further regulated.

• We doubt that Hartalega will run into major issues with the US Customs and Border Protection (CBP). Its current social compliance efforts are miles ahead of many companies at time of respective investigations. Additionally, the majority of its workers’ accommodation is already in line with the ILO’s workers’ housing recommendations, being fully furnished with the necessary healthcare, leisure and dining infrastructure.
   
• The group highlights its adherence to environmental guidelines. (1) Air emission results are well below the Department of Enviroment’s standards; (2) water consumption intensity of ~0.12m3/1,000 pcs is well below the industry average of 0.26m3/1,000 pcs; (3) It targets to reduce another 22% of greenhouse gas emissions by FY24, having utilised a biomass thermal energy plant and a solar power system as more sustainable sources of energy.

Source: AmInvest Research - 15 Jun 2021