Summary

• Hartalega Holdings Bhd’s (Hartalega) wholly-owned subsidiary, Hartalega NSM Sdn Bhd has inked a sales and purchase agreement with Northern Gateway Free Zone Sdn Bhd, a wholly-owned subsidiary of Northern Gateway Sdn Bhd which is the Master Developer of the Kota Perdana Special Border Economic Zone (SBEZ) for the acquisition of approximately 250.0-ac. of land in Bukit Kayu Hitam, Kedah. Concurrently, both parties also signed an option agreement for Hartalega to purchase another 130.0-ac. of land in the same location.

• After taking into consideration of the land size, we reckon that the price tag of the acquisition at RM228.7m to be fair, translating to RM21 psf. The acquisition is expected to be completed by 1Q22 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 RM1.78bn as of 3QFY21.

• The acquisition marks Hartalega’s latest phase of growth, with a CAPEX allocation of RM7.00bn to build 16 new manufacturing facilities over the next 20 years. The move also imprints Hartalega’s foray into the northern region of Peninsular Malaysia which is in line with government’s efforts to drive the economic growth in the northern corridor regions as well as Hartalega’s long term annual capacity plans that targets approximately 95.0bn pieces by 2027, from 43.0bn presently.

• We view that the acquisition to be earnings accretive over the long run in line with the group’s effort to expand their production capacity gradually in order to match the pent-up demand. Post Covid-19, we reckon that personal hygiene measures is expected to remain in place as part of the prevention measures will continue to boost demand.

• Although we noticed that delivery lead time has started to dwindle, we reckon that the ASPs of gloves will remain elevated in subsequent quarters as gloves players’ backlog orders are still relatively stretched. This is premised to the demand-supply imbalance as the global shortage of rubber gloves will last beyond 1Q2022, according to Malaysian Rubber Glove Manufacturers Association.

Valuation & Recommendation

• With the abovementioned acquisition has yet to contribute into our earnings forecast, we made no changed to our current earnings forecast and we maintained our BUY recommendation on Hartalega, but with lower higher target price of RM15.38 (from RM20.26).

• Our target price is derived by ascribing a lower targeted PER of 16.4x (previously 21.6x) to their FY22f EPS of 93.8 sen. The target PER is -1.5SD (previously -1.0SD) of 5Y historical forward average as we expect the exponential surge in ASP to taper post-2021. Nevertheless, we still favour Hartalega for their strong compliances, boasting MSCI ESG rating of ‘AA’; the leader among 93 companies in the health care equipment & supplies industry.
   
• 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 Mar 2021