Summary

• Hartalega Holdings Bhd's subsidiary Hartalega NGC Sdn Bhd has proposed to acquire a 60.6-ac. tract of land in Sepang, Selangor, from Kumpulan Tanjung Balai Sdn Bhd for RM158.3m. The industrial land is a sub-divisional tract that forms part of a larger plot measuring 126.1-ac. and is located adjacent to the existing NGC Sepang.

• Upon acquisition, the tract will be used for the construction of additional glove manufacturing facilities to increase the group's installed capacity. The land will house additional glove manufacturing facilities, namely the Next Generation Glove Manufacturing Complex 1.5 (NGC 1.5) which will boost additional installed capacity by 19.0bn pieces of gloves per annum upon completion. Together with the previous land acquisition back in 1Q2020 measuring 38.5-ha., Hartalega’s total installed capacity will hit approximately 95.0bn pieces per annum by end-2027.

• After taking into consideration of the land size, we reckon that the price tag of the acquisition to be fair, translating to RM60 psf. The acquisition will be funded by internally generated funds and/or existing credit facilities. We see no difficulties in obtaining external financing as Hartalega is backed by positive operating cash flow and net cash position of RM474.5m as of 1QFY21.

• We view that the acquisition to be earnings accretive over the long run in line with the group’s move to expand their production capacity gradually in order to meet the super-normal demand. Already, the group is maximising up their production to meet the order backlog to mid-2021.

• The demand for healthcare products and equipment are expected to see no tapering at current juncture following the second wave of outbreaks in several countries across the globe. We think that the ASPs of gloves will continue to increase in upcoming quarters while the heightened awareness of safety and hygiene daily lifestyle will become the new normal even if a potential vaccine is available for mass production over the foreseeable future.

Valuation & Recommendation

• With the abovementioned acquisition has yet to come into picture, we keep our earnings forecast unchanged and we maintained HOLD recommendation on Hartalega at RM18.44 after assigning an unchanged targeted PER of 55.0x to their FY21f EPS of 33.5 sen.

• The target PER is +1.0SD of 5Y historical forward average, which is justifiable premised to the solid demand over the upcoming 12-18 months and rising ASPs, coupled with the solid fundamentals where it commands the highest margins vs. its peers.

• Downside risks to our recommendation include slower demand should Covid-19 pandemic be contained sooner-than-expected as well as a weaker USD against the ringgit. The latter could result in margins compression as Hartalega’s sales are mainly export-oriented.

Source: Mplus Research - 11 Aug 2020