Summary

• Hartalega Holdings Bhd (Hartalega) has confirmed that 35 of its employees tested positive for Covid-19, of which 20 of them are at located the Bestari Jaya operations and 15 at the Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang. The affected employees are under medical care at a government healthcare facility, while all primary contacts over the past 14 days have been identified and placed under quarantine and will undergo subsequent testing before being permitted to return to work.
• We reckon that cautiousness prevails as investors will continue to monitor on developments in coming days, which may continue to affect the group’s operations. As several production lines are temporary halted to carry out disinfection and sanitisation works, capacity loss at current juncture is expected to be miniscule (<1.0% of annual production output).
• We note that a total of 8,772 workers were tested for Covid-19 from 7th December 2020 till 10th December 2020 which is in line with the National Security Council orders that ensures all foreign workers are mandatory to undergo the aforementioned testing.
• Following the outbreak, we expect Hartalega to implement stricter measures to contain and prevent the spread of Covid-19 virus amongst its workers. With that in mind, Hartalega is actively seeking to implement a periodical test amongst its workers as early detection will be able to contain further damages to current operations.
• As the availability of Covid-19 vaccine at the doorstep across the glove in near future, we think that the pent-up demand trend may likely to taper in 2022. The move, coupled with the impending new entrants of gloves manufacturers and expansion of existing capacities will subsequently bring the meteoric rise of gloves ASPs to an inflection point. Nevertheless, we reckon that despite the retracement in ASPs of gloves, it will still come higher against pre-Covid-19 levels.

Valuation & Recommendation

• We tweaked out earnings forecast lower by 0.7% and 4.9% to RM1.85bn and RM2.01bn for FY21f and FY22f respectively to account for the loss of production capacity, slightly lower ASPs and stronger Ringgit against the US Dollar.
• Consequently, we maintain our BUY recommendation, but our fair value is now lower at RM15.40 (previously at RM23.34). Our target price is derived by ascribing a lower targeted PER of 26.2x (from 43.0x) to their rolled-over FY22f EPS of 58.8 sen. The revised target PER is -1.0 SD of the 5Y historical forward average as we reckon that the ASPs may decline gradually overtime post-FY22f.
• Downside risks to our recommendation include slower demand should Covid-19 pandemic be contained sooner-than-expected as well as a weaker US Dollar against the ringgit. The latter could result in margins compression as Hartalega’s sales are mainly export-oriented.

Source: Mplus Research - 15 Dec 2020