Hartalega’s FY21 full year net profit grew by 564% YoY to RM2.89bn, on the back of stronger ASP. The results came in above our but was within consensus estimates at 107% and 95% respectively. Discrepancy in our forecast was predominantly due to lower-than-expected costs, given the stronger operating leverage. There have been indications of downward pricing in the market, which in our view is due to one of the glove makers redirecting its unsold capacity to the other markets. We think this is likely to alter the pricing dynamics in the market, leading to lower ASPs, but we are of the view that ASPs should still remain elevated in the short to medium term. We cut our FY22-23F earnings forecast by 16-18%, to factor in the impact of decline in pricing. Our TP is subsequently lowered to RM15.90. Maintain Outperform on Hartalega. Hartalega has also declared an interim dividend of 17.7sen per share.

• Stronger ASP, but lower sales volume. Hartalega’s 4QFY21 revenue grew by 196% YoY, to RM2.3bn, mainly due to ASP increase of 273% YoY. The record high revenue was achieved despite the lower sales volume, which was down by 23% YoY, due to temporary closure of production lines to curb the spread of Covid-19 in its plants, as well as a lack of shipment availability, given the global container shortage. Consequently, the utilization rate was much lower during the quarter, at 64%, as compared to 96% in 4QFY20. As a result of the rising ASPs, net margins improved by 33.8ppts YoY to 48.7%. Net profit also grew by more than eight-folds YoY to RM1.12bn.

• Expansion plans. Plant 7 (+3.4bn pcs pa) has added 2 more lines, bringing total commissioned lines to 6 lines, while the remaining 4 surgical lines will be commissioned gradually in the coming quarters. Construction works for Plant 8 (at NGC 1.5) are currently underway and first line is expected to commence in 4QCY21. Beyond the NGC 1.5 expansion, the Group could choose to either begin developing NGC 2.0 or its Kedah expansion, which will solely depend on the readiness of the infrastructure and also authorities’ approval.

• Outlook. Management has shared that there are some downward revision in glove prices in the market, which we think it is mainly due to one of the glove makers having to redirect its unsold capacity to other market in a short time frame, causing market prices to fall. We think that this could potentially alter the pricing dynamics in the market and might result in a gradual decline in ASPs, but prices should remain elevated.

Source: PublicInvest Research - 5 May 2021