Summary

• Hartalega’s 2QFY21 net profit surged 432.0% YoY to RM545.0m on the combination of higher sales volumes, higher average selling prices (ASPs) and improved production efficiency. Revenue for the quarter jumped 89.7% YoY to RM1.35bn. A first interim dividend of 3.85 sen, payable on 18th December 2020 was declared.

• For 6MFY20, cumulative net profit soared 285.7% YoY to RM764.7m. Revenue for the period rose 67.9% YoY to RM2.27bn. The reported earnings accounted for 66.5% of our previous estimates of RM1.15bn and 38.3% against consensus forecast of RM1.99bn. The reported figures came above expectations, owing to the elevated ASPs, which we expect the trend to stay put over subsequent quarters.

• Moving forward, Plant 7 of NGC is slated to commence by end-2020. Upon completion in 2022, the total annual installed capacity would increase by 2.7bn pieces to 44.00bn pieces. Beyond that, the acquisition of 95.0-ac. of land will house NGC 2.0 comprises of 7 production plants that will add 82 production lines with total installed capacity of 32.30bn pieces, bringing total production capacity to 76.30bn pieces per annum.

• The elevated demand has brought customers stock holdings down to 2-3 weeks as oppose to 2-3 months during pre-Covid-19 levels. With the number of new Covid-19 cases across the globe remain on the rise, we reckon that demand will be sustainable throughout FY21 and potentially till FY22.

• Meanwhile, MARGMA expects the Malaysian rubber glove exports to jump to 220.00bn pieces of gloves valued at RM21.80bn in 2020 (up from 170.00bn pieces valued at RM17.40bn in 2019) which accounts to about two-third of the global supply. Already, the first seven months of the year saw glove exports rose 50.1% YoY to RM15.06bn.

• We continue to view that the potential imposition of windfall tax on glovemakers companies will not be on the table given that the supernormal profits are also translating to higher tax paid (in absolute value). The aforementioned imposition may also derail rubber glove industry players reinvestment plans.

Valuation & Recommendation

• With the reported earnings coming above expectations, we raised our earnings forecast by 61.9% and 84.3% to RM1.86bn and RM2.12bn for FY21f and FY22f respectively to account for the higher-than-expected ASPs.

• Consequently, we upgrade our recommendation to BUY (from Hold) with a higher target price of RM23.34 (from RM18.44). Our target price is derived by ascribing a targeted PER of 43.0x to their FY21f EPS of 54.3 sen. The target PER is in line with the 5Y historical forward average.

• 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 - 27 Oct 2020