Summary

• Hartalega’s 2QFY22 net profit grew 67.7% YoY to RM914.0m, largely driven by higher average selling prices (ASP). QoQ wise, it declined 59.5% due to normalisation of ASP and weaker sales volume impacted by the implementation of Enhanced Movement Control Order (EMCO). Revenue for the quarter expanded 49.4% YoY to RM2.01bn.

• The reported earnings came at 78.7% of our estimates of RM4.03bn, whilst it amounted to 82.4% against consensus forecast of RM3.83bn. We deem the figures to be in line as we expect sequential earnings reduction in 2HFY22 with the final quarter to be impacted by the implementation of “Cukai Makmur” under Budget 2022. An interim dividend of 35.2 sen per share, payable on 2nd December 2021 was declared.

• To-date, 8 out of the 10 lines under Plant 7 of NGC have commenced operations (unchanged from the previous quarter) with the remaining 2 lines targeted for commissioning in coming months. We note that Hartalega will begin commence operations of Plant 8, which is under NGC 1.5 in April 2022. The aforementioned expansion with additional 4 production lines is expected to boost annual production capacity to by additional 19.0bn pieces to 63.0bn pieces.

• We expect further normalising of ASPs in coming quarters amid the influx of new capacity alongside with inventory adjustments. Still, the resilient demand owing to the rising awareness of hygiene may keep ASPs above the pre-Covid-19 levels.

• Given that workforce and production has gradually returned in recent months, capacity utilisation has started to see some improvement for all local gloves manufacturers. Hence, that may provide some cushion to the downward revision of ASP in coming quarter.

• To-date, more than 90.0% of Hartalega employees including migrant workers have completed the two doses of vaccination. Meanwhile, Hartalega maintained its leader position among 94 companies in the health care equipment & supplies industry under the MSCI ESG Rating at “AA”.

Valuation & Recommendation

• Although the reported numbers were deemed to be within our expectations, we trimmed our earnings forecast by 9.5% and 6.8% to RM3.65bn and RM1.93bn for FY22f and FY23f respectively to account for the impact from the implementation of “Cukai Makmur” in FY22f as well as weaker utilisation rate.

• Following the earnings revision, we retained our BUY recommendation on Hartalega, but with a lower target price of RM6.78 (from RM7.90) after rolling our valuation metrics to FY23f for a better reflection of normalised ASP, going forward. Our target price is derived by ascribing a targeted PER of 12.0x to their FY23f EPS of 56.4 sen. Meanwhile, Hartalega has now implemented a dividend policy of distributing a minimum 60.0% of annual net profit, after taking into consideration of the one-off special tax under “Cukai Makmur”.

• Downside risks to our recommendation include weaker-than-expected ASP 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 - 3 Nov 2021