Results Highlights

• Hartalega’s 4QFY20 net profit climbed 26.5% Y.o.Y to RM115.6 mln. Revenue for the quarter grew 13.7% Y.o.Y to RM777.9 mln. The outperformance was mainly attributed a combination of higher sales volumes, lower raw material costs and lower energy costs. A third interim dividend of 2.05 sen per share, payable on 26th June 2020 was declared.

• For FY20, cumulative net profit fell 4.2% Y.o.Y to RM435.8 mln owing to the higher operational costs arising from the setup of Plant 6 in NGC. Revenue for the year, however, rose 3.4% Y.o.Y to RM2.92 bln.

• Additionally, Hartalega’s bottomline saw mild deterioration; falling 4.7% Q.o.Q in 4QFY20, largely due to lower sales volumes and slightly weaker margins.

• The latest earnings and revenue were broadly in-line with our expectations at 96.2% and 98.2% 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 RM616.8 mln (+14.8%), in-view of stronger sales volumes and better margins amid the pent-up demand arising from the Covid-19 pandemic.

• We also expect stronger performance in the upcoming quarter as glove manufacturers ramp up capacity to meet the spike in global demand for medical gloves amid the coronavirus outbreak

Prospects

We note that four out of the total 12 lines under Plant 6 of Next Generation Integrated Glove Manufacturing Complex (NGC) have commissioned in 1Q2020. Although there were some time lag for the group’s expansion plans due to the implementation of Movement Control Order (MCO), Hartalega remain committed to roll out the remainder of the lines by 2H2020. Upon completion, Plant 6 will bring additional approximately 4.6 bln gloves to the group’s total production. At the same time, the average plant utilization rate has improved to above 95% (from an average 88% recorded in FY19). Moving forward, we think that the the rising number of infections from Covid-19 will continue to spur demand for healthcare related products and we see Hartalega will continue to capitalise on the pandemic. We reckon that the group will be kept busy, even with the new plants coming into the picture. Meanwhile, MARGMA expects the Malaysian rubber glove exports to jump to 225.0 bln pieces (+32.4% Y.o.Y) in 2020 to cater for the rising global demand rubber gloves that is expected to hit 330.0 bln units for the year. The move will see Hartalega capitalize on the opportunity, given that gloves export demand traditionally only rise by 5.0%-10.0% per annum.

Valuation and Recommendation

Despite the surge in share price was already ahead of our fundamentals, we maintained our HOLD recommendation on Hartalega amid spike in demand may likely to prolong. Our target price was also revised higher at RM7.89 (from RM6.85) by ascribing to a higher target PER of 50.0x (from 42.0x) to Hartalega’s FY21 EPS of 15.8 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. Downside risks to our recommendation include slower demand should Covid-19 be contained sooner-than-expected as well as a weaker Dollar against ringgit. The latter could result in margins compression as Hartalega’s sales are mainly export-oriented.

Source: Mplus Research - 19 May 2020