Summary

• Hartalega’s 4QFY21 net profit leapt 878.1% YoY to RM1.12bn on the combination of higher average selling prices (ASPs) and improved production efficiency amid the lower utilities and upkeep expenses that offset the lower sales volume. Revenue for the quarter jumped 195.5% YoY to RM2.30bn. A second interim dividend of 17.7 sen per share, payable on 9th June 2021 was declared.

• For FY21, cumulative net profit soared 565.4% YoY to RM2.89bn. Revenue for the year jumped 129.0% YoY to RM6.70bn. The reported earnings came above our expectations, accounting to 111.2% of our estimates of RM2.59bn, whilst it amounted to 95.4% against consensus forecast of RM3.03bn. The stronger-thanexpected performance was attributed to the elevated ASPs.

• To-date, 6 lines under Plant 7 of NGC have commenced operations (4 lines were under operations in the previous quarter). We note that sales delivery for the quarter was impacted to the shortage of containers (which remain unresolved) and temporary shutdown in certain production lines due to the Covid-19 outbreak.

• Moving forward, the remaining 4 surgical lines under Plant 7 will be commission progressively in subsequent quarters which will increase annual installed capacity to 44.0bn pieces. Beyond that, Plant 8 which is under NGC 1.5 expected to commence operations by end-2021 will increase annual production capacity to 63.0bn pieces.

• While ASPs for the quarter under review is still on the rise, we reckon that the upward trajectory has already hit an inflection point. Still, demand remains relatively robust as it continues to outweigh the current supply. At the same time, the resurgence of Covid-19 cases globally will continue to support the demand over the near term.

• Meanwhile, MARGMA expects the Malaysian rubber glove shortages to remain on the horizon. Export revenue is expected to reach RM38.0bn in 2021 vs. RM35.3bn recorded in 2020 with global demand for rubber gloves rising 22.0% YoY to 420.0bn pieces. Despite the new entrants of glove manufacturers this year, the demand of gloves may continue to outstrip supply beyond 2021.

Valuation & Recommendation

• Despite the reported earnings coming above our expectations, we made no changes to our earnings forecast as we reckon that ASP has already peaked and begun to taper in recent months.

• We maintained our BUY recommendation on Hartalega, but with a lower target price of RM17.20 (from RM20.26). Our target price is derived by ascribing a lower targeted PER of 17.0x (from 20.0x) to their FY22f EPS of 101.3 sen. The target PER is -1.0SD of 5Y historical average as we expect the exponential surge in ASP to taper in subsequent quarters.

• Downside risks to our recommendation include softer 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 - 5 May 2021