• Robust global demand of about 8% to 10% p.a. and capacity expansion driving Hartalega growth.

• Launching of the non-leaching antimicrobial medical gloves provides greater opportunities in securing Hartalega’s pole position in the global nitrile gloves market.

• Cost-pass through from higher ASPs of up to 5% helping mitigate rising costs.

• We revised our FY18/19 forecast by 6.6%/12.8% respectively to factor in the better growth prospects.

• Maintain HOLD but we raised our TP to RM11.00 based on PER 34x (+1SD above 3-years historical mean) over CY19 EPS.

Robust demand driving growth

Increasing global demand due to improving healthcare standard, greater global usage and supply curb in China are benefiting Hartalega. Currently, the company has a total 30bn capacity of gloves p.a which is now running at utilisation rate of above 90%, with capacity being booked out 3 months ahead. This strong demand growth has brought forward its expansion plans for NGC plant 4 to be fully commissioned in Jan 2018 instead of April 2018.

New product provides greater opportunities

Launching of non-leaching antimicrobial medical gloves in 2HFY18 is expected to bring greater opportunities for Hartalega. Special quality inherent in this product is the ability to kill 99.99% of germs within 5 minutes of contact and reduce the risk of Hospital Acquired Infections (HAI) associated with cross contamination of micro bacteria between doctors – patients.

Higher ASPs helping to mitigate rising costs

Rising cost from the rise in energy and labour cost as well as an appreciating ringgit are expected to be mitigated by higher ASPs of up to 5% effective January 2018. Existing cost-pass through mechanism has been widely accepted in this industry due to the inelastic demand of rubber gloves.

Maintain HOLD with higher TP of RM11.00

We revised our FY18/19 forecast by 6.6%/12.8% respectively after revising our capacity utilisation rate higher to reflect growth from higher demand and improvement in margins from better economy of scale. Our target price is increased to RM11.00 from RM8.70 based on PER of 34x (+1SD above 3-years historical mean) over CY19 EPS. While we are confident in Hartalega’s good earnings prospect, we believe this has been largely priced in. Maintain HOLD.

Securing supremacy in nitrile gloves

Robust demand driving Hartalega’s growth

The global demand for nitrile gloves has been expanding, supported by improving hygiene standards, growing use of gloves in the medical & non-medical industry and increase demand for lighter weight nitrile gloves due to China’s supply curb of vinyl gloves. Hartalega is now running at capacity utilisation rate of above 90% and fully sold for 3 months until April 2018. Glove products are exported mainly to developed countries (i.e North America, Europe, etc.) of about 95%. Moving forward we believe there is great potential for the company to exploit emerging countries with low per capita consumption of gloves but have huge population base and high GDP growth potential.

Capacity expansion and economy of scale are on track

In meeting with the higher demand, Hartalega had already initiated capacity expansion which is on track for completion as planned. This was observed in its NGC plant 4 which will be fully-commissioned (12 lines) in January 2018 which is 3 months earlier than expected. Plant 5 timeline for commissioning in 2HCY18 remains on plan (refer table 1). However, there is a possibility of an earlier commencement of plant 5 if demand surpass its current capacity. Economy of scale have also been gained from NGC plants due to the adoption of new and advanced technology production process which increases production to 45k per hour vs 38k per hour of its older plants. This has allowed production to improve by about 20k per line/p.a. to 75k per line/ p.a. NGC’s production currently contribute c.55% of total gloves produced by Hartalega.

Greater opportunities from launching of non-leaching antimicrobial medical gloves

Hartalega is expected to launch a new innovative product i.e. non-leaching antimicrobial medical glove in 2HFY18. The outstanding quality of this product is that it is able to kill 99.99% of germs within 5 minutes of contact and is completely dry without leaving any trace of antimicrobial activity on the area of contact. Other than that, it can greatly reduce the risk of Hospital Acquired Infections (HAI) via cross contamination of micro bacteria between doctors - patients. These infections are especially hard to treat given their resistance to antibiotics and according to a Centre for Disease Control and Prevention (CDC) research, an estimated 1.7 million patients are infected by HAI per year with about 75k patients with HAI die during their hospitalisation in the United States. We believe demand for the new product will be positive as HAI prevention is a major consideration for hospitals globally. These gloves are to be sold in all global markets in 2018 with the exception of the United States which would probably be in 2019 pending approval from the FDA.

Higher ASPs helping to mitigate rising costs

Rising costs are expected from the increase in natural gas and labour costs about c.4% of total cost. In addition, the appreciating ringgit would also exert some pressure on operational costs. However, with the cost-pass through mechanism in place, higher ASPs up to 5% effective January 2018 are expected to mitigate the rising costs.

Earnings review

Raising our earnings forecasts.

Outlook for Hartalega remains positive due to the improving global demand supported by ongoing capacity expansion and improved operating efficiencies from its Next Generation Integrated Glove Manufacturing Complex. We raised our earnings forecast for FY18/19 by 6.6%/12.8% respectively after revising our utilisation rate higher (c.90% from c.88%) to reflect growth from higher demand and improve margin from better economy of scale. Overall, we expect Hartalega to record a 3-year net profit CAGR of 24% in FY17-20F.

Maintain HOLD but raised our TP to RM11.00.

We raised our TP to RM11.00 (from RM8.70) based on 34x PER (+1SD above 3-years historical mean) over CY19 EPS. Although valuations are at a 13% premium to the 3 years sector average of 30x, the premium is justified given its i) leadership position in nitrile glove segment and ii) higher margin (FY18 EBITDA margin of 25.9% vs sector peer average of 18.5%). Even though we like the stock for its sound fundamentals and earnings prospect, we believe the stock is fully valued at this juncture. Maintain Hold.

Source: BIMB Securities Research - 26 Jan 2018