Results Highlights

• Hartalega’s 3QFY20 net profit was almost unchanged at RM121.3 mln (+1.3% Y.o.Y), from RM119.8 mln a year ago, despite the 10.1% Y.o.Y growth in revenue at RM796.6 mln. The lackluster profitability was mainly attributed to lower ASPs. Even so, the group declared a second interim dividend of 1.8 sen per share, payable on 27th March, 2020.

• In contrast, cumulative 9MFY20 net profit fell 12.5% Y.o.Y to RM319.2 mln, compared to RM364.8 mln in the same period last year, weighed down by lower ASPs, higher depreciation expenses and increased cost of sales. Revenue, meanwhile, was flat at RM2.15 bln vs RM2.14 bln previously.

• Sequentially, Hartalega’s bottomline continued to improve; growing 16.8% Q.o.Q in 3QFY20, largely due to increased sales volumes and slightly better margins.

• The latest earnings and revenue were broadly in-line with our expectations at 70.6% and 72.1% of our previous full-year forecast net profit and turnover of RM452.0 mln and RM2.98 bln respectively. Even so, we tweaked our FY21 earnings forecast higher to RM537.4 mln (+5.4%), in-view of stronger sales volumes and better margins. Revenue forecast, meanwhile, was maintained at current levels.

• We also expect to see a slight bump up in the final quarter as manufacturers ramp up capacity to meet the spike in global demand for medical gloves amid the coronavirus outbreak.

Prospects

Moving forward, we expect to see near-term demand for medical gloves to surpass the previous year following rising cases and death toll from the novel coronavirus outbreak. Already, the number of casualties from the virus has exceeded the SARS epidemic in the early 2000s.

MARGMA also expects the Malaysian rubber glove exports to jump to 230.0 bln pieces (+19.8% Y.o.Y) in 2020 – led by worsening coronavirus outbreaks around the globe. Consequently, global demand is foreseen to increase by 15.0%-20.0% this year vs 8.0%- 10.0% normally.

Meanwhile, the group has starting running the first line of Plant 6 ahead of our expected timeline and will continue to commence production for the remaining lines progressively. Ultimately, annual capacity is expected to hit 44.7 bln pieces of gloves by FY22, from 36.6 bln currently.

Most glove manufacturers have slowed down their expansion plans in the last few quarters amid concerns of oversupply but we believe that the prolonged health crisis could restart expansion activities in the sector as demand for medical supplies skyrockets. We also believe there is a potential for higher ASPs going forward, intandem with increased cost as they ramp up production and manpower to meet urgent deliveries.

Valuation and Recommendation

We upgrade our recommendation on Hartalega to BUY (from Hold) with a higher target price of RM6.85 (from RM5.75) by ascribing to a higher target PER of 43.0x to Hartalega’s FY21 EPS of 15.9 sen as we look forward to strengthening demand, higher capacity and improving cost efficiencies. The higher target PER is in-line with the increase in peers’ valuation, on the back of improved profitability prospects.

Our target PER remains at a premium to Hartalega’s competitors premised on: (i) Hartalega’s solid position as the global market leader in the nitrile glove segment, (ii) superior operational efficiency in terms of production speed and the lower number of workers per glove output, (iii) consistent and high quality control standards, and (iv) solid fundamentals where it commands the highest net profit margin vs. its peers.

Upside risks to our recommendation include weaker input costs (i.e.: nitrile and latex prices), as well as a stronger Dollar. The latter could result in stronger earnings performance as Hartalega’s sales are mainly export-oriented.

Source: Mplus Research - 12 Feb 2020