Summary

• Hartalega’s 3QFY21 net profit soared 723.3% YoY to RM1.00bn on the combination of higher sales volumes, higher average selling prices (ASPs) and improved production efficiency. Revenue for the quarter leaped 167.4% YoY to RM2.13bn. A second interim dividend of 9.65 sen, payable on 26th February 2021 was declared.

• For 9MFY21, cumulative net profit surged 452.1% YoY to RM1.77bn. Revenue for the period jumped 104.8% YoY to RM4.40bn. The reported earnings came above our expectations, accounting to 95.7% of our estimates of RM1.85bn, whilst it amounted to 68.2% against consensus forecast of RM2.59bn. The stronger-than-expected performance was attributed to the elevated ASPs, which we expect the trend to stay put over subsequent quarters.

• Hartalega’s cash pile ballooned to RM2.14bn, translating to net cash per share of RM0.63 (c. 4.8% of share price) in 3QFY20. To-date, we note that 4 lines under Plant 7 of NGC have commenced operations. This bumps the group’s installed capacity to 43.0bn pieces per annum, operating under 116 production lines.

• Moving forward, 4 production lines will be commissioned in March 2021, whilst the remaining 4 surgical lines under Plant 7 will be commission in subsequent quarters which will increase annual installed capacity to 44.0bn pieces. Beyond that, Plant 8 is expected to commence operations by end-2021, followed by NGC 2.0 in 2022.

• We believe that the pent-up demand will sustain the elevated ASPs in subsequent quarters as gloves manufacturers continues to address the shortages in global glove supply via aggressive expansion plans. Despite the potential new entrants of gloves players coming onto stream in 2021, we reckon there is minimal impact, given that supply of raw materials constraint, whilst existing delivery orders have been fulfilled till at least 2H2021.

• Meanwhile, MARGMA expects the Malaysian rubber glove shortages to last beyond 1Q2022. Export revenue is expected to reach RM29.8bn in 2020 with global demand for rubber gloves at 360.0bn pieces. For 2021, MARGMA expects export revenue to hit RM34.0bn with expect global demand for rubber gloves at 420.0bn pieces.

Valuation & Recommendation

• With the reported earnings coming above our expectations, we raised our earnings forecast by 40.5% and 37.3% to RM2.59bn and RM3.21bn for FY21f and FY22f respectively to account for the higher-than-expected ASPs.

• We maintained our BUY recommendation on Hartalega, but with a higher target price of RM20.26 (from RM15.40). Our target price is derived by ascribing a targeted PER of 21.6x to their FY22f EPS of 93.8 sen. The target PER is -1.0SD of 5Y historical forward average as we expect the exponential surge in ASP to taper towards end-2021.

• 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 - 26 Jan 2021